As many organizations begin to post their second quarter earnings reports, it’s clear that the impact of Target Canada’s bankruptcy is still felt today, with companies such as Hasbro declaring that growth has been hindered “by declines in Canada following Target's decision to exit the country.”
In fact, as a result of the retailer’s insolvency, the chain owes $3.4 billion to 1,796 creditors, much of which will remain unpaid due to court protection.
Several financial leaders have seized upon this news to remind businesses of the need for accounts receivable insurance, or trade credit insurance. But as it turns out, the Target Canada bankruptcy is just one of many catalysts driving demand for brokers who can offer these types of policies.
“Typically, trade credit insurance covers insolvency, protracted default and bankruptcy,” said Andrew Leonard, national practice leader, financial products,
Marsh.
While this type of coverage was originally intended for manufacturers, it now has broader applications today.
“You have financial institutions using it, you have organizations with long-term contracts using it, you have consulting services using it, so it really is anyone that has a counterparty risk on an open accent terms where you provide a good or service and are paid at a later date,” he said.
In the case of Target Canada, vendors and suppliers that were covered by this product were able to obtain 90% indemnity and have their representative insurers subrogate on their behalf to facilitate the collections process, instead of retaining a lawyer or hiring an outside party to do it.
But while the retailer brought these policies back into the media limelight, the attention actually follows a steady, long-term uptick in demand for these products. While Leonard notes that North America has a long way to go to catch up with the European markets, financial setbacks like those in oil and gas are creating a renewed urgency for trade credit policies.
“We are seeing a substantial number of inquiries about this product across many different industries,” Leonard said. “The number of insurers licensed to sell this in Canada has increased in the past two years and there is a lot more interest following an increase in capacity and the willingness to take on risks.”
Brokers can market these policies to potential clients based on their strategic benefits as well, including the opportunity for companies to venture into new markets, use credit information to conduct due diligence on buyers and offer longer terms of payment to be more competitive against rivals.
For these reasons, the outlook for brokers is promising.
“if you look at the Trade Credit Insurance industry in Canada and the number of jobs created, while I don’t know the exact number, it has definitely been on an upswing for the past 10 years,” Leonard said.
