Foreign Exchange Risk

Income from foreign operations is accounted for in the company’s home currency. Foreign income is subject to the same risk factors as income produced in the home currency, plus forex risk.

• US insurance company writing insurance in foreign countries may be exposed to currency risk
• For example, a US company writes insurance in Germany. If the denominated currency of invested reserves is US dollar while the liability will be paid in euros, the fluctuation in EUR/USD exchange rate will force the company to increase or decrease the reserve
• Assume the company sets up a reserve in the amount of 10 million euros which is equal to 13.075 million US dollars at current exchange rate of 0.765. Should the exchange rate go down by 1%, the reserve will be forced to increase to 10/0.765/0.99 = 13.20 million US dollars
• In any event the vast majority of a company’s currency risk resides in the repatriation risk