Managing FX Risk Insurance Sector

Insurance companies with premiums derived from business outside their country of origin typically transact in foreign exchange. This need to collect premiums and pay out claims in different currencies exposes their overseas revenues and investments to fluctuating exchange rates.

FX Risk Exposure

Currency market movements create challenges that can lead to financial volatility and profit erosion. Insurers that adopt a reactive approach to FX risk management may make impulsive decisions that subsequently leave them exposed to sudden rate fluctuations.

1. Premiums

Premiums are often denominated in foreign currencies – typically USD and EUR. This creates a “mismatch” in currency flows, forcing insurers to absorb unwanted FX risk when converting back to their reporting currency. 

To shield your premiums from this risk, insurers require a bespoke FX strategy that helps you better understand and manage their FX exposure. Once in place, this will safeguard them against exchange rate volatility now, and in the future. 

2. Claims

Claim payments in alternative currencies are often written in the underlying premium currency, which aren’t carried as active balances. Moreover, exchange rate fluctuations between a claim being agreed and the settlement payment being made can influence the value of these payments – a significant depreciation in the rate could increase settlement costs, while an appreciation could create savings.   

Overseas claim payments are usually stated in the original premium currency, which is not kept as an active balance. Additionally, changes in exchange rates between agreeing on a claim and making the settlement payment can affect the payment value – if the rate depreciates, settlement costs may rise, while appreciation could lead to savings.

Solutions

As a currency specialist with a relationship-led service and a deep understanding of this global sector, Lumon works in collaboration with insurers to establish proactive risk management strategies that seek to mitigate FX risk.

1. Tailored FX Strategies

Having gathered an in-depth understanding of your requirements, exposures, pain points, and risk appetite, Lumon stabilises your premiums by developing a tailored FX strategy that leverages solutions like forward contracts – an agreement to buy or sell currency at a specified price on a predefined date. 

For instance, if you receive monthly overseas premiums in dollars or euros, these premiums can be secured back to sterling by locking in an exchange rate. By mitigating currency risk using flexible solutions, we empower you to maintain competitive pricing and enhance overall financial stability.

Spot trading along with Limit Orders and Stop Losses can help you manage short-term volatility, while Flexible Forward Contracts, layered hedging and a blended trade management approach can protect against longer-term risks.

2. Efficient Global Claim Settlements

Lumon’s efficacious processes for global claim settlements ensure that international transactions are executed seamlessly, providing you with the agility to respond to client needs globally. 

Lumon’s online platform facilitates the efficient and cost-effective handling of regular claim payments – a streamlined approach that saves time and money compared to traditional methods. 

Lumon employee presenting

Want to know more?

Find out how our customised FX solutions can stabilise prices and protect profit margins by helping you take control of your international payments.

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