Receivables Insurance: A Golden Opportunity
It's hot in Europe, but just getting started in Canada. Why brokers need to take a good, hard look at trade credit insurance
It’s a testament to the obscurity of receivables insurance that its leading advocate in Canada once had no clue what it was.
“While my official introduction was probably not ‘til the early ‘90s, I did have a couple of clients who, at one point… asked me if we could do [receivables],” says Mark Attley. “And, of course, I had no idea.”
Attley didn’t stay in the dark too long. His partner, Ron Doyle, introduced him to receivables insurance (which also goes by the alias “trade credit insurance”) when there were only two companies underwriting it in Canada. The pair dove headlong into the product, carving out a niche and eventually bringing in $10 million in annual premiums. It wasn’t easy; he says the first two or three years of dealing in receivables were “missionary work.” Having sold Millennium CreditRisk Management to Princeton Holdings in 2008, Attley is now association president of Receivables Insurance Canada and is on a new mission: getting other brokers to follow suit.
“Top-performing brokers—if they’re not looking at this, they’re not top performing. Because they’re missing a big piece of the puzzle.”
Part of the struggle to raise the product’s profile is that it has a certain mystique around it; even those who know about it often misunderstand it, like string theory. Attley says it doesn’t need to be that way. If a company sells products or services to a customer, and that customer can’t pay, receivables insurance covers most of that loss, softening the blow to the balance sheet. “It is simple, in that sense that… it protects what we call the most significant asset on a company’s balance sheet, and that’s the accounts receivable.”
Born in the Boom
Like so many insurance innovations, we get receivables from London. Attley explains that the Brits and other European countries were writing trade credit insurance by the end of the 19th century, but it really took off only after the Second World War. In an attempt to bolster their economies, many Western countries set up export credit agencies, like Export Development Canada.
EDC is still a big player in receivables, and Attley says it’s “a big supporter of what we’re trying to do; they’re trying to build the market,” but for a long time, it was just about the only game in town. When Attley got into receivables, “there really were only two underwriters in the market, and one of those was EDC, which [some] wouldn’t consider an underwriter because it’s a Crown corporation.”
Around the same time that Attley was educating himself and his clients on receivables insurance, it was taking off in Europe. Several countries privatized their export credit agencies’ insurance arms, including Coface (in France) and part of the U.K.’s Export Credits Guarantee Department. Coface, Euler Hermes and Atradius “went about acquiring the privatized insurance operations of these export credit agencies around Europe… then they morphed and there’s been subsequent consolidation.”
This wave of privatization meant that Europe was—and still is—miles ahead of Canada in terms of receivables insurance penetration, where it’s north of 30 percent in some countries. Here, penetration is still in the single digits, and that’s partly because not enough brokers know about it. Attley says there are only 30 to 35 brokers who consistently send in applications, which is “a fraction of what’s available.” But supply and demand are both growing.
Demand got there first: during the credit crisis of 2008-2009, a lot of companies suddenly wanted to cover the risk of a creditor defaulting or going bankrupt. For underwriters, some of them were too late.
“You get a call on some of those more difficult credits, and markets were not able to offer coverage, because, essentially, you don’t cover a burning house or a house that’s about to burn,” says Andrew Leonard, a Marsh broker who specializes in receivables. The crisis sent many companies scrambling, but those that did cover their receivables and have developed relationships with insurers benefited throughout that period from those relationships.
“So the timing was sort of off, and then, since things have settled down over the last few years, we’ve noticed an increase in demand.”
It’s not only brokers that are wising up to receivables’ potential. Leonard says it’s “more pull demand than push demand,” meaning that companies are now more likely to start the conversation with their brokers, rather than the other way around. “You see it now mentioned in financial statements, you see boards of directors asking questions about credit risk… I think that’s fundamentally changed.”
Brokers are also more aware of the product, thanks to expansion on the supply side. There are now eight licensed companies offering the product in Canada, with Zurich the most recent entrant. The gang of eight includes Europe’s “Big Three” which Attley mentioned, as well as EDC and the Guarantee Company of North America.
“Ten or 15 years ago, if somebody asked me who are the insurers involved in the underwriting of receivables insurance, you wouldn’t have recognized any of them,” says Attley. “Now you’re starting to see names that brokers will recognize. They probably already deal with or have contracts with some of these companies.”
Attley and Leonard doubt there’s much expansion left in the supply, but the premiums ought to grow: Receivables Insurance Canada says that the Canadian market is around $200 million right now, but could top $350 million within five years.
“I think our trade credit solutions… [are] going to be a bigger part of our 2015, for sure, and we feel very good about the prospects for that team and that product,” says Alister Campbell, CEO of The Guarantee. Receivables is “a really nice growth opportunity for brokers because it’s an under-serviced market.”
Don’t Fear the Receivables
Ironically, what makes receivables an enigma is also what should make it attractive to brokers: It doesn’t act like a conventional insurance policy.
“We would call it a dynamic product,” says Attley. “It never is far from the controller or the risk manager or the CFO’s desk, because customers change, customers grow and it’s always a dynamic scenario, whereby you’re saying, ‘Oh you’re trying to build your business in new markets, new geographic markets, you may start a new product line that has new customers.’ So this product is constantly being reviewed, which I think probably causes some consternation for brokers, because it’s not as simple as just putting the thing together and sticking the policy in a drawer and forgetting about it for a year.”
Leonard says this is what drew him to the product. “It’s a wonderful world to be a part of. It’s a dynamic business. The role of a broker is extremely important in the trade credit space. It’s a question of finding the right solution for your client, and at the end of the day, the solutions offered by every insurer differs substantially.”
It’s also an opportunity for a broker to prove their worth as a trusted advisor, rather than in a purely sales-based role. Clients feel the effects of receivables insurance, even if they never file a claim.
“When I first really came upon it,” says Attley, “I thought, ‘Well this is the only insurance product I know that has some tangible benefit outside of the obvious indemnity part of it.’ Because banks borrow against receivable—and banks are more comfortable when they’re insured, which means they’ll maybe give better financing terms—they may give larger financing terms, because [receivables] are insured.”
Leonard adds that another benefit for companies is credit information. “The insurers nowadays have a… wealth of information, and you can sort of see [that] in the way of what the insurers are offering: provide credit risk ratings of an insured’s portfolio, risk-weighted averages, risk weighted by country, comments on a given buyer. Honestly, that information is essentially a third-party audit of your portfolio that you’re essentially getting as part of a trade credit insurance solution.”
There are still some barriers of perception for receivables insurance to overcome— starting with the name. Campbell says the obscurity might stem “from the fact that so many people call it credit insurance, and as a result they either confuse it with credit cards or some kind of banking transaction. But receivables insurance is actually a very useful tool for all kinds of small and mid-sized businesses.”
It’s not just the target businesses’ size that has thrown people off, but also their location. Traditional users have been export-focused sectors like steel, textiles and agriculture, but Attley says that doesn’t mean there’s no risk at home. “It’s not just about export… because at the end of the day, any company can go out of business, whether it’s a domestic customer or an export customer.”
In fact, thanks to the country’s “very liberal bankruptcy laws,” it’s just as important domestically as it is abroad. Leonard says if you examine bankruptcy statistics, Canada and the U.S. “were hit pretty hard over the last couple of years, so I think that sort of changed the dynamic a little bit, where you see companies looking at their entire portfolio as [opposed] to just trying to segregate the international export piece.”
With so much risk at home, Receivables Insurance Canada is hoping to bring the awareness here, too. “My view is that, if we get two or three brokers in each region aware of it, we’re doing our job,” says Attley. They’re also targeting people “on the periphery” who are involved in the discussion on credit risk, like lawyers and accountants, but brokers are where the growth will come from.
“You may say, as a broker, ‘I know nothing about it,’ and that may be true, that may be the case. But you should at least be identifying the risk and saying, ‘Well, I probably can’t help you with that, but here’s somebody who can.’ So that’s sort of the approach that we’re kind of taking on it, and it’s baby steps, I have to admit. It takes time to get people to rethink.”
Copyright 2014 Rogers Publishing Ltd. This article first appeared in the November 2014 edition of Canadian Insurance Top Broker magazine