Insurance for exports helps reduce risks
Brigitte: Expanding your business into international markets can be highly profitable, but it can also be risky. Similar to insurance for your home or vehicle or your personal property, trade credit insurance - which is also known as receivables insurance - can help protect Canadian companies doing business in international markets. I'm Brigitte Audet Martin, editor-in-chief of CanadExport, the official magazine of the Canadian Trade Commissioner Service. Here with me today is Chris Short, a member of the Receivables Insurance Association of Canada, or RIAC. Hello Chris, thank you for joining us.
Chris: Good morning, Brigitte, and thanks for having me.
Brigitte: So it seems that, as a business owner, what you don't know can hurt you, and what many Canadian companies may not know is that receivables insurance can go a long way in mitigating the risks associated with exporting to foreign markets. Chris, maybe you can start by telling us about receivables insurance. What is it, exactly?
Chris: Whether a company is selling domestically or exporting abroad, receivables - which are the amounts owed to a company for their goods or services - are made more secure through receivables insurance. The insurance offers protection against non-payment as a result of a variety of factors, such as a buyer's insolvency, or its inability to pay its bills in a timely manner. Coverage is also available for losses due to political turmoil. Business risks are typically higher when companies enter international markets. Generally, receivables insurance customers purchase a policy that insures the receivables from all of its buyers in all of the geographic regions in which it sells. Individual limits are established for each buyer that ideally reflect the maximum outstanding receivable balance under normal trading conditions.
Brigitte: What are some of the things that can go wrong when companies are doing business abroad, and how can having receivables insurance help companies protect themselves?
Chris: Well, all of the risks inherent in selling domestically are also involved in international trade. Buyer faults, slow payments, etc. can and do happen wherever you sell. However, these risks can be heightened when going into new markets. Global market conditions, customs, laws, languages - it's all factors that come into play. And the ability to make rational decisions with regard to the granting of credit can be more difficult as a company expands into new markets. Receivables insurers are well-equipped to guide Canadian companies that are entering new markets. We have enormous amounts of data in our portfolio on existing and potential customers, as well as highly trained risk analysts and teams of risk mitigation professionals that make export transactions look very much like domestic ones.
Brigitte: Can you tell us about some other cases where having trade credit insurance has helped companies?
Chris: Sure. There have been, as I said, well-known companies that have filed for protection, including Sears, which was this past summer. Sears, was a very well-known retailer that had been involved in the Canadian market and the U.S. market for many years. U.S. Steel Canada, which was the first case that we really remember that was a Canadian entity that filed bankruptcy when the U.S. parent did not. Historically, we felt that Canadian entities would be protected by a U.S. parent, but it was not in this case. Similar to that, and probably the best-known, most recent bankruptcy was Target Canada. Target is a very very well-known brand in the U.S., it's very popular with people going into the U.S. to buy their products, and they continue to be very strong in the United States. They just made a mistake when they came to Canada; they mis-read the market, and they didn't provide to the Canadian consumer really what they were looking for which was Target U.S.. That claim came as a complete surprise, which is really what credit insurance is there to protect against; it's the unexpected loss. Insurers were approving large limits until the very end. Internationally, there were close to twenty large well-established companies throughout the world in 2016 that filed for protection, all with revenues in excess of a billion Euros. The largest - Hanjin Shipping, a Korean entity - had revenues in excess of five billion Euros, showing that very well-known companies are at risk. In addition, a lot of companies that are not as well-known, certainly where customers selling internationally don't know as much about the customer they're selling to, and we're here to protect that as well.
Brigitte: So, would you say that companies of all sizes stand to benefit from having this type of insurance? I mean, you mentioned large corporations, but what about small and medium-sized enterprises - or SMEs, as we call them?
Chris: The benefits of insuring receivables are really apparent for all sizes of companies. Very often, large companies in excess of a billion dollars will purchase receivables insurance to protect against catastrophic loss. It's balance sheet protection, or, as we call it, sleep insurance. On the smaller end of the spectrum - companies such as SMEs - they utilize the product as really an outsourcing of the credit function. They get knowledge from a team of brisk underwriters throughout the world, and they have information on companies or markets that they're going into, as well as the basic premise which is protection against loss. Credit insurance really is a fit for companies of all sizes.
Brigitte: But many companies do export to international markets without this type of insurance. Could this be, actually, harmful to their business?
Chris: Very often, companies that are new to export may not be willing, or they're not able, to take the risks they are normally able to take in the domestic market. Banks that lend on an asset-based scenario may be unwilling to provide support for export receivables, meaning that a company that is starting to export needs to rely on either a domestic portfolio, a domestic receivables-base, or a domestic cash-flow in order to expand into foreign markets. Banks will, however, often see the benefits of receivables being backed by an insurer, and will include export receivables in the borrowing base, as well as allowing for a higher borrowing base for both domestic and export, which allows for cash-flow, which is the life-blood of the company and will help support international expansion.
Brigitte: It seems that many Canadian companies could benefit from having this type of protection, but perhaps a lot of them don't know enough about it.
Chris: Yeah, that's really the reason why RIAC was formed seven years ago. Many of us are owned by European-based credit insurers, where the market share is roughly twice as big as it is in Canada. What we see, though, is there is a high value in Canada where customers who purchase the product renew the coverage on a year-to-year basis at least to the same extent that they do in Europe. So it tells me that there's a very high level of value for the customers, as well as for banks, and it's our job to expand the presence and the awareness of our product throughout Canada.
Brigitte: I think the message here for companies doing business in international markets is that they don't have to face all of the business risks alone.
Chris: That's very true, Brigitte. The insurers and brokers that form RIAC are here to help Canadian companies grow profitably. It is very much a win-win for all of us.
Brigitte: That was Chris Short of the Receivables Insurance Association of Canada, or RIAC. Chris, thank you for joining us today.
Chris: Thank you for having me, Brigitte.
Brigitte: We have been talking about how Canadian companies can use receivables insurance to help mitigate the risks associated with exporting to global markets. For more information, visit the RIAC website at receivablesinsurancecanada.com. As well, you can visit the TCS website at tradecommissioner.gc.ca for information on doing business in international markets. Signing off, I'm Brigitte Audet Martin, editor-in-chief of CanadExport magazine.
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