Private carriers ‘crowded out’ of Canadian trade credit insurance market

Private carriers ‘crowded out’ of Canadian trade credit insurance market | Insurance Business

Private carriers ‘crowded out’ of Canadian trade credit insurance market

A chief executive at a global trade credit insurance firm is calling for change after years of “unfair” market conditions in Canada.

David Dienesch, CEO of Euler Hermes Canada, says the Government of Canada needs to make changes to the mandate and activities of Export Development Canada (EDC) in order to open the trade credit insurance market up for private carriers and provide more export opportunities for Canadian corporations.

“The export credit insurance market in Canada is very uncompetitive. Private carriers are up against a monolith government entity, which has created an un-level playing field with no advantage for Canadian companies,” said Dienesch. “Canadian companies are not exporting as much as they could be. Our export market share doesn’t seem to be growing very much beyond the United States, despite the fact that we’ve signed some new trade treaties.

“I don’t think Canadian companies are well educated about the advantages of export credit insurance. That’s partly because insurance carriers and brokerages have chosen not to invest in the product because the EDC is crowding us out. It’s a completely uneven playing field for the private insurance companies who operate in this space.”

Canadian companies do not have to use the EDC for their export credit insurance needs. They have the ability to choose private partners such as Euler Hermes Canada, but, in doing so, they may miss out on certain up-front advantages of choosing the government insurer.

One of the advantages of export credit insurance is that it helps companies grow their books of business. It provides security when trading with new entities and in new territories. In order to grow, companies need access to working capital and so they need the support of the Canadian banks. If companies insure their export receivables, they can increase their margins and the banks will likely lend more money.

According to Dienesch, roughly 40-50% of companies that buy export credit insurance do so based on the fact that they can increase their margining and therefore stand a better chance of getting a greater bank loan. The problem for private insurers is that Canadian banks are only allowed to refer credit insurance business to the EDC because of the way the Canadian Bank Act is set up. That presents “a huge disadvantage” for other companies like Euler Hermes Canada, Dienesch added.

“How do we compete against that? We invest in our distribution channels, using brokers and our own sales agents to educate consumers and show them that export credit insurance has huge benefit and can generate positive returns,” he told Insurance Business. “However, even in distribution we’re on the back foot compared to the EDC. They also have the ability to tap into the brokerage network, and, because of their financial advantage, it seems they’re able to provide enhanced commissions to the brokers versus what the rest of the market is providing. That’s not fair.

“Secondly, in order to build our distribution network, we have to get our agents licensed across the country. That process, depending on the province, can take anywhere between 3-6 months and it’s a large expenditure on people who aren’t yet generating revenues for the company. The EDC does not have to go through that same licensing process, meaning they can avoid the big cost associated with generating the distribution models needed for this product.”

Such an uneven playing field begs the question: why would private trade credit insurers bother competing against the EDC?

Dienesch said there’s “huge potential” in the Canadian marketplace as the country’s export strategy is being enhanced with new treaties and trade negotiations. However, that potential can only be reached if the Canadian government allows private companies to support Canadian exporters, he added. Every 10 years, the Canadian minister of international trade must initiate, as per the Export Development Act, a review of the EDC’s mandate and activities, in consultation with the minister of finance. That process is currently underway and Dienesch hopes this will be the year change is initiated.

“In the meantime, we will continue to invest in our distribution channels. There’s money to be made in export credit insurance for the brokerages,” he said. “Brokers are going to have to invest in the product for a period of time (about a year) before it generates returns, but when it does, those returns will be good, and the clients will be pleased.”