Stakeholders in the broad Canadian agri-food industry are grappling with the uncertain future of bilateral trade with the United States, which hinges on a 25 per cent tariff on Canadian goods and services that U.S. president-elect Donald Trump promised would come early in his second tenure in office.
For some, these tariffs signal a potential unraveling of the Canada-U.S. trade relationship as we know it. Others see them as another instance of Trump’s characteristic bluster: rooted in posturing but possibly serving as an opening move for upcoming trade negotiations.
Why it matters: Trump’s inauguration as U.S. president takes place Jan. 20 and was preceded by threats of a blanket 25 per cent tariff on Canadian goods.
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If the former scenario prevails, Canada’s options may be limited. But there are some options Canadian agribusinesses — particularly those that trade directly with the U.S. — have in their back pockets: trade credit insurance that insures a seller against payment default, and political risk insurance.
So says a representative of a brokerage company that connects corporations with specialized insurance products. Chantal Brazeau is the senior vice-president and national practice leader – trade credit and political risk at BFL Canada.
Although most consider risk management a buffer against loss, BFL also considers it a vehicle for growth, she said.
“Risk management allows companies to enhance decision-making, improve operational processes and often foster innovation. Sound risk management allows companies to more judiciously allocate their resources toward the pursuit of profitable growth opportunities.”
Trade credit insurance signals strong risk management
So how does that risk management philosophy, combined with trade credit insurance, help agribusinesses contend with current trade uncertainty? How does it work when trying to convince a U.S. customer to continue trading despite the possible tariff-related risks to their bottom lines?
Trade credit insurance gives Canadian sellers the ability to extend more appealing credit options and payment term alternatives to buyers, said Brazeau. It can protect a company’s balance sheet against losses on their receivables stemming from buyer payment default or insolvency.
“If we consider that tariffs will not only adversely impact Canadian competitiveness but will also likely lead to negative impacts on exporters’ and importers’ profitability, trade credit insurance is an important tool to protect against these deteriorating credit conditions.”
With this added security, Canadian exporters may be more comfortable extending additional credit to their buyers. They can also consider extending more competitive payment terms.
“Being able to offer improved trading terms to buyers can help protect these buyer relationships and encourage continued trading despite the presence of tariffs,” Brazeau added.
What’s more, the incremental profits are typically greater than the trade credit insurance premium. In that sense, purchasing a trade credit insurance policy comes with an immediate return on investment, she noted.
In this way, the risk management tool becomes one for growth management as well.
“If you’re insuring your credit exposure to a buyer, if you’re insuring that additional risk you’re taking, it’s allowing you to sell more to them.”
The insurance can also improve a company’s status in the eyes of lenders.
“What’s not well understood is that pledging insured receivables to a company’s lender may improve a company’s borrowing capacity. Bankers acknowledge the enhanced credit quality of this collateral and therefore are willing to lend more on the basis of those insured receivables,” Brazeau said.
“So trade credit insurance is a very powerful tool to not only facilitate increased sales with either existing buyers or new buyers, domestically or internationally, but it also allows improved access to financing and often on better terms.”
Another benefit of trade credit insurance, said Brazeau, is the credit review and evaluation performed by trade credit insurers.
These risk evaluations provide insights that inform the seller’s appetite for credit exposure to their buyers.
“Because insurers are evaluating the buyer risk that they’re being asked to underwrite, they’re providing really helpful insights to the seller on the credit risk that they’re taking.
“It’s a tool that complements the work that’s being done by companies’ credit risk departments, so it’s very valuable.”
Although trade credit insurance may sound like a novel concept in the insurance world, it has actually been around for a long time. Public awareness, however, has always lagged behind.
“I think if people really understood the benefits of the solution in terms of how it can help (vendors) sell more, how it can help them take on more risk with some of these buyers, extending better terms and facilitating this growth, I think the value proposition of the solution is clear,” said Brazeau.
Buffering political risk
Political risk insurance is another risk management product brokered by BFL. It insures Canadian companies against foreign contract or investment losses stemming from political risk events, said Brazeau.
One example of a political risk event includes government currency controls. These might prevent a company from converting local revenue into hard currency, compromising its ability to repatriate that revenue to the company’s home country.
Other covered perils include import and export restrictions, trade embargoes and political violence events in the country of the trade partner.
“Political risk insurance also covers losses resulting from government interference, expropriations, confiscation — the types of events that would effectively have an impact on contract values and/or investment values.”
Carrying political risk insurance is a key element of a comprehensive political management strategy, she said, particularly for companies doing business in developing markets.
Brazeau uses the Asian market as an example. While Canada is well-positioned to sell to Asia and has already developed good relationships with some of its countries, the broad Asian market — among other non-traditional destinations — still presents some risks.
“When you’re going into a new market, you’re having to deal with a new legal and regulatory environment. The rules are different. There are new trading counter parties with whom there is no track record and for whom credit information is often quite sparse.
“Trade credit and political risk insurance would be very appropriate, certainly for Canadians that are going further afield and deciding to diversify away from the U.S, and look at emerging markets (as) new destinations for exports and investment.”
Life insurance can grow business as well
Trade credit and political insurance aren’t the only risk management tools that double as growth instruments.
One example, says Farm Credit Canada (FCC), is the farm lender’s loan insurance, which serves as life insurance for outstanding debt on most FCC loans.
In the case of loss of life, the policy amount can be applied to a loan or even pay it off depending on the coverage agreement.
FCC loan insurance can act as a direct growth strategy tool when producers seek financing, said Curtis Grainger, FCC director of lending products and pricing.
“There actually are situations where in order to get financing — not even necessarily from FCC but financing in general — a lender might not provide the financing unless that individual has some sort of insurance.”
It’s particularly important to have “key people” such as owners or on-farm specialists insured, said Grainger. Otherwise, the farm may risk losing its ability to operate in the event of the death or injury of the key person.
“If they’re really wanting to take an aggressive growth strategy, I would say it’s more likely they might need that type of coverage because there’s that key person risk within the operation that people want to make sure is mitigated.”
Loan insurance is also attractive to producers with reduced access to other types of life insurance, he said. In that context, the growth strategy lies in the farm’s ability to stay operating, said Grainger.
“For a lot of customers, maybe farming is their only employment and they don’t have access to other life insurance options in order for their farm to be resilient into the future.
“They really need that to help make sure their farm can be a generational farming operation and without having that in place, sometimes it can really hinder that. And then obviously it can’t grow if it’s in financial trouble.”
