Currency Risk and Its Impact on International Insurance Claims Settlements for Indian Policyholders

Indian companies with international insurance programmes face a risk that is rarely discussed at the time of policy placement but becomes painfully apparent at the time of claims: currency risk. The gap between the exchange rate assumed when the policy was purchased and the exchange rate prevailing when a claim is settled can materially affect the adequacy of the insurance recovery.

Consider a straightforward example. An Indian pharmaceutical manufacturer insures its API plant in Hyderabad under a property policy with a sum insured of INR 150 crore, adequate to cover the full replacement value of the plant at the time of policy inception. The plant's machinery is imported from Germany and Switzerland, and replacement requires procurement in euros and Swiss francs. At policy inception in April 2025, the INR/EUR rate is approximately 90. The sum insured of INR 150 crore provides a euro-equivalent coverage of approximately EUR 16.7 million.

Twelve months later, a major fire destroys the plant. By the time the claim is assessed and the replacement machinery is ordered, the INR/EUR rate has moved to 97 (a 7.8% depreciation of the rupee). The same replacement machinery that cost EUR 16.7 million now costs INR 162 crore in rupee terms. The policy, however, pays a maximum of INR 150 crore (the declared sum insured), leaving the policyholder with an out-of-pocket shortfall of INR 12 crore, entirely attributable to currency movement.

This scenario is not hypothetical. The Indian rupee has depreciated against the US dollar by approximately 35% over the past decade (from approximately INR 60/USD in 2015 to approximately INR 84/USD in early 2026), with similar depreciation against the euro and other major currencies. For Indian companies whose insured assets include imported machinery, equipment, or components, this trend creates a systematic underinsurance risk that compounds with each year of rupee depreciation.

The currency risk is bidirectional. Indian exporters insuring marine cargo in foreign currency face the opposite risk: if the rupee appreciates between the time of shipment and the time of claim settlement, the INR equivalent of the claims payout may exceed the originally intended coverage, creating a windfall. However, given the rupee's long-term depreciation trend against major currencies, the underinsurance risk is the dominant concern for most Indian policyholders.

The invisible nature of this risk is the core problem. Currency risk is not listed as an exclusion in the policy. It does not appear as a coverage gap in the broker's gap analysis. It is not discussed in the underwriter's risk assessment. Yet it can erode 5-15% of the insurance recovery in a single year and significantly more over a multi-year period.

The standard SFSP (Standard Fire and Special Perils) policy in India and the international property policies used for Indian multinational programmes define the insured value in a single currency, typically INR for Indian-domiciled policies and USD or EUR for international programme master policies. The policy pays claims in the denomination currency up to the declared sum insured. If the cost of reinstatement in the actual procurement currency differs from the declared value due to exchange rate movement, the difference falls on the policyholder.

Under a reinstatement value basis of settlement (the standard for commercial property in India, as opposed to indemnity/depreciated value), the insurer pays the cost of reinstating the damaged property to its pre-loss condition using new materials of like kind and quality. The IRDAI-prescribed reinstatement value clause requires that the sum insured represents the cost of reinstatement at the time of reinstatement, not at the time of policy inception. This language creates an expectation that the policy adjusts for cost increases, including currency-driven increases, between inception and claim.

However, the reinstatement value clause is subject to the condition of adequacy: the sum insured must be adequate to cover the full reinstatement cost at current prices, and if the sum insured is less than the reinstatement cost, the average clause applies. The average clause reduces the claims payout proportionally: if the sum insured is 90% of the reinstatement value, the claim is paid at 90%. In the pharmaceutical plant example, if the reinstatement cost has increased from INR 150 crore to INR 162 crore due to currency movement, the sum insured is now only 92.6% of the reinstatement value, and the average clause would reduce every claim (including partial losses) to 92.6% of the assessed loss amount.

International property policies used in global programmes add further complexity. A master policy denominated in USD that covers Indian assets creates a reverse currency risk: the Indian assets are valued in INR, but the policy pays in USD. If the rupee depreciates, the USD equivalent of the INR asset values decreases, potentially making the sum insured appear adequate in USD terms while being inadequate in INR terms at the point of reinstatement.

Some international policies address this through a "currency clause" that specifies the exchange rate to be used for claims settlement. The clause may fix the rate at the date of loss, the date of repair/reinstatement, the date of claims payment, or the average rate during the reinstatement period. The choice of exchange rate date significantly affects the outcome. Using the date of loss rate locks in the exchange rate at the time of damage, which protects the policyholder if the currency subsequently depreciates further during the reinstatement period. Using the date of reinstatement rate more accurately reflects the actual cost of reinstatement but may result in a higher or lower payout depending on the direction of currency movement during the repair period.

The Foreign Exchange Management Act (FEMA), 1999, and the regulations issued by the Reserve Bank of India under FEMA govern the receipt of insurance claims payments in foreign currency by Indian entities. For Indian companies with international insurance programmes, FEMA compliance affects how claims are settled, in what currency, and through what channels.

When an Indian company's master policy is denominated in USD and a claim arises from damage to Indian assets, the claims payment may be made in USD (from the master insurer, which may be an international insurer or reinsurer) or in INR (if the claim is settled locally through the Indian fronting carrier or the Indian co-insurer). Under FEMA's current account transaction rules, an Indian company can receive insurance claims payments in foreign currency through authorized dealer banks without specific RBI approval, provided the transaction represents a genuine insurance claim and is supported by appropriate documentation (the policy, the survey report, and the claims settlement letter).

However, FEMA introduces several practical considerations. First, the INR conversion. When a claims payment is received in USD, the authorized dealer bank converts it to INR at the prevailing market rate on the date of credit. If the claim has been in process for several months and the rupee has moved against the dollar during this period, the INR equivalent of the claims payment may differ from the amount the policyholder expected based on the exchange rate at the time of the loss. The policyholder has no control over the conversion rate, which is determined by the bank at the time of processing.

Second, the timing of remittance. International claims settlements involve multiple parties (the local insurer, the master insurer, the reinsurer) and multiple approval stages. The total settlement process from loss notification to claims payment can take six to eighteen months for large commercial claims. During this period, currency movements can be substantial. The INR has experienced intraday volatility of up to 1.5% and monthly volatility of up to 3-4% against the USD. Over a twelve-month claims settlement period, the cumulative currency movement can easily exceed 5-10%.

Third, FEMA's reporting requirements. Indian companies receiving insurance claims payments in foreign currency must report the transaction to the authorized dealer bank with supporting documentation. For claims exceeding specified thresholds (currently USD 100,000), the bank may require additional documentation, including a certificate from a chartered accountant confirming that the claim relates to a genuine insurance loss. Non-compliance with FEMA reporting can result in penalties, compounding, and in serious cases, proceedings before the Directorate of Enforcement.

Fourth, the interaction between FEMA and tax. Insurance claims receipts are generally not taxable if they represent compensation for the loss of a capital asset (because the insurance proceeds replace the destroyed asset). However, if the claims payment includes a foreign exchange gain (because the rupee depreciated between the loss date and the payment date, resulting in a higher INR equivalent), the treatment of this implicit forex gain is a grey area under Indian tax law. Conservative tax advice treats the forex gain component as income, while aggressive positions treat the entire claims receipt as a non-taxable capital recovery.

Marine cargo insurance and trade credit insurance are the two coverage lines where currency risk has the most direct and frequent impact on Indian policyholders.

In marine cargo insurance, the insured value of the cargo is typically declared in the currency of the commercial invoice. An Indian exporter shipping textiles to the UK with a CIF value of GBP 500,000 declares this value on the marine cargo policy. If the cargo is damaged during transit and a claim arises, the insurer settles in GBP (or the INR equivalent at the prevailing rate). If the INR/GBP rate has moved between the shipment date and the claims settlement date, the INR equivalent changes. For an Indian exporter whose costs are in INR, the relevant metric is the INR recovery: does the claims payment, converted to INR, cover the actual cost of replacing the goods?

The 10% "uplift" that is standard in marine cargo valuation (CIF value plus 10%, as per the Institute Cargo Clauses) provides a limited buffer against currency fluctuations and incidental costs, but a 10% buffer can be exhausted by currency movement alone in periods of significant rupee depreciation. An Indian exporter who shipped goods when the INR/GBP rate was 105 and receives a claims payment when the rate is 98 (a 6.7% appreciation of the rupee against sterling) actually receives fewer rupees than expected, though the GBP amount remains the same. Conversely, if the rupee depreciates to 112, the exporter receives more rupees per pound, but the cost of replacing the goods (procured from Indian suppliers in INR) may have also increased due to input cost inflation.

For Indian importers, the currency risk in marine cargo claims is reversed. An Indian auto component manufacturer importing precision tools from Japan with a CIF value of JPY 50 million faces the risk that the rupee depreciates against the yen between the shipment date and the claim settlement date. If the tools are damaged and the insurer settles at JPY 50 million, the INR cost of replacing the tools may be higher than the sum insured in INR terms if the yen has strengthened.

Trade credit insurance presents a different currency dynamic. When an Indian exporter's overseas buyer defaults on payment, the trade credit insurer (ECGC or a private insurer) pays a percentage (typically 85-90%) of the insured invoice value. If the invoice is in USD and the rupee has depreciated between the invoice date and the claim settlement date, the INR equivalent of the insured payment increases, which is favorable for the exporter. However, if the rupee has appreciated, the exporter receives fewer rupees than it would have received if the buyer had paid on time.

For ECGC policies, the claims settlement is typically made in INR at the exchange rate prevailing on the date of claims settlement, not the date of default or the date of the original invoice. This creates a currency timing risk that ECGC policyholders should factor into their financial planning. For large export transactions with extended credit periods (180-360 days), the currency movement between the shipment date and the claims settlement date can be significant.

Indian policyholders can mitigate currency risk in international insurance claims through two complementary approaches: structuring the insurance policy to minimize currency exposure and using financial instruments to hedge the residual risk.

On the policy structuring front, several techniques are available. First, declare the sum insured in the currency of reinstatement rather than in INR. If the insured asset's replacement requires procurement in USD, declare the sum insured in USD. Most Indian insurers can issue policies with sum insured declared in foreign currency, though the premium is collected in INR at the prevailing exchange rate. The claim is then settled in USD (or INR equivalent at the claims settlement date exchange rate), ensuring that the foreign currency coverage keeps pace with the foreign currency reinstatement cost.

Second, use a day-one value provision that automatically adjusts the sum insured upward by a specified percentage (typically 10-20%) to account for increases in reinstatement cost between policy inception and the date of a potential loss. While the day-one provision is primarily designed to account for asset value inflation, it also provides a buffer against currency depreciation. The provision increases the sum insured by the declared percentage from policy inception, and any claim is settled based on the higher adjusted sum insured without applying the average clause, provided the original day-one declaration was accurate.

Third, include an exchange rate protection clause in the policy wording. This clause specifies that if the exchange rate between the policy currency and the reinstatement currency moves by more than a specified percentage (typically 5-10%) between the policy inception date and the date of loss, the sum insured is automatically adjusted to reflect the currency movement. This clause is not standard in Indian policy wordings but is available in the London and international markets and can be incorporated into Indian policies through specific endorsement.

On the financial hedging front, Indian companies can use foreign exchange forward contracts, options, or cross-currency swaps to hedge the currency exposure embedded in their insurance programme. A forward contract locks in a specific exchange rate for a future date, eliminating the uncertainty of currency movement. For an Indian manufacturer with a property sum insured of EUR 20 million, purchasing a 12-month forward contract to sell INR and buy EUR at a predetermined rate ensures that the INR equivalent of the EUR-denominated claims payment remains constant regardless of spot market movement.

The cost of forex hedging in India is driven by the interest rate differential between INR and the foreign currency. As of early 2026, the 12-month forward premium for INR/USD is approximately 1.5-2.0%, meaning an Indian company pays 1.5-2.0% of the notional amount to lock in the exchange rate for 12 months. This cost should be compared against the potential currency loss: a 5-10% rupee depreciation over the policy period would create a much larger uninsured gap than the 1.5-2.0% hedging cost.

However, hedging the entire insurance programme's currency exposure is rarely practical or cost-effective. A more targeted approach is to hedge only the assets with significant foreign currency reinstatement requirements and only for the expected maximum loss (EML) rather than the full sum insured. This reduces the hedging cost while addressing the most material currency risk.

Examining real-world (anonymised) claims scenarios illustrates the magnitude of currency risk and the practical steps that could have mitigated the impact.

Case one: Indian steel plant fire with imported rolling mill. An Indian steel manufacturer in Gujarat suffered a major fire that destroyed its rolling mill, originally imported from Germany at a cost of EUR 12 million. The property policy sum insured was INR 108 crore, calculated at the inception exchange rate of INR 90/EUR. The fire occurred 14 months after inception, by which time the rupee had depreciated to INR 95/EUR. The replacement cost of the rolling mill was EUR 12.5 million (reflecting both currency depreciation and a 4% increase in the equipment price in euro terms). The INR equivalent replacement cost was INR 118.75 crore, but the maximum recovery under the policy was INR 108 crore. The uninsured gap was INR 10.75 crore, of which approximately INR 6 crore was attributable to currency movement and INR 4.75 crore to equipment price inflation.

Mitigation that could have helped: declaring the sum insured in EUR rather than INR, combined with a day-one provision of 15%, would have provided an adjusted sum insured of EUR 13.8 million (approximately INR 131 crore at the claims settlement exchange rate), more than covering the actual reinstatement cost.

Case two: marine cargo claim with rupee appreciation. An Indian exporter shipped pharmaceuticals worth USD 2.3 million to a buyer in the US. The cargo was damaged during transit, and a total loss was declared. The INR/USD rate at the time of shipment was 84.5, implying an INR-equivalent insured value of approximately INR 19.4 crore. By the time the claim was settled (four months later), the rupee had temporarily appreciated to 82.8/USD. The claims payment of USD 2.3 million converted to INR 19.04 crore, approximately INR 36 lakh less than the exporter's original INR cost basis. While the gap was modest relative to the claim size, it illustrates that currency risk operates in both directions.

Case three: business interruption claim with extended settlement period. An Indian auto component manufacturer's factory in Pune was damaged by flooding, triggering a business interruption claim under its BI policy. The BI policy, placed through a global programme, was denominated in USD with a declared gross profit of USD 15 million. The loss occurred when the INR/USD rate was 83.5. The BI claims assessment took eleven months, during which the rupee depreciated to 86.2/USD. The assessed gross profit loss was INR 62 crore, but the policy's USD-denominated limit of USD 15 million converted to INR 129.3 crore at the settlement rate, more than sufficient to cover the assessed loss. In this case, the currency movement actually benefited the policyholder because the policy was denominated in a currency (USD) that strengthened against the INR during the claims period.

These cases demonstrate that currency risk is not abstract. It creates real financial shortfalls (or occasional windfalls) that affect the policyholder's ability to fully reinstate damaged property and recover lost income. The direction and magnitude of the impact depend on the currencies involved, the denomination of the policy, and the time elapsed between policy inception and claims settlement.

Indian risk managers should integrate currency risk management into their insurance programme design, renewal process, and claims management protocols. The following recommendations provide a practical framework.

First, conduct a currency exposure audit of the insurance programme. For each policy in the programme, identify the currency of the sum insured, the currency of the reinstatement cost (which may differ from the sum insured currency if insured assets include imported machinery or components), and the currency of the premium payment. Quantify the percentage of the total insured value that is exposed to foreign currency reinstatement costs. For Indian manufacturing companies with significant imported machinery, this percentage is commonly 30-60% of the total property sum insured.

Second, align the policy denomination currency with the reinstatement currency wherever possible. If 50% of the insured assets require reinstatement in USD, consider splitting the sum insured into an INR component and a USD component, or declaring the entire sum insured in USD. Discuss the options with the broker and insurer during the renewal process, as currency denomination affects premium calculation, claims settlement, and FEMA compliance.

Third, use day-one value provisions generously. A day-one uplift of 15-20% costs relatively little in additional premium (typically 5-10% of the base premium for the uplift portion) but provides a meaningful buffer against both currency depreciation and asset price inflation. The day-one provision should be calculated annually based on the actual exposure, not carried forward from prior renewals without reassessment.

Fourth, review the sum insured at every renewal with reference to current exchange rates, not prior-year rates. The most common cause of currency-related underinsurance is inertia: the sum insured was calculated three years ago at a rate of INR 75/USD and has not been updated despite the rupee moving to INR 84/USD. A simple mid-term adjustment of the sum insured to reflect current exchange rates eliminates the most basic form of currency-driven underinsurance.

Fifth, negotiate a currency clause in the policy wording for assets with significant foreign currency reinstatement exposure. The clause should specify automatic sum insured adjustment for currency movements exceeding a defined threshold (5-10%) and should specify the exchange rate to be used for claims settlement purposes.

Sixth, consider financial hedging for the foreign currency component of the insurance programme, particularly for companies with total foreign currency reinstatement exposure exceeding INR 50 crore. The hedging programme should be coordinated with the company's treasury function and should use instruments (forwards, options) that the treasury team is already familiar with.

Seventh, at the time of a claim, monitor the exchange rate between the loss date and the expected settlement date. If the currency is moving adversely (rupee depreciating against the reinstatement currency), consider accelerating the claims process to minimize the currency impact, or purchasing a forward contract to lock in the settlement date exchange rate. The claims team and the treasury team should coordinate to ensure that currency risk is managed during the claims settlement period, not just at the time of policy placement.