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Risky Business


The businesses adage goes something along the lines of “without risks, there’s no reward.”

Yet, regardless of whether you’re running a global export/import business or a startup widget-making enterprise, Canadian companies need to look before they leap when doing business abroad, say insurance and risk management professionals.

“There are so many things that are not in our control,” says Darius Delon, Calgary-based president and consultant for Risk Management 101. “Businesses should look at what is the risk of a certain event happening to them and the impact to their strategic objectives.

“For example, what if I decide to take my widgets and sell them in Russia? Am I going to be able to get paid for that product? At what point in time will I get paid? Is there a good means of recovery in case there’s a delay in accounts receivable?”

Seeking to protect foreign-based assets and mitigate bad debt, many export/import companies in Canada are now turning to different forms of political risk insurance. The receivables insurance market (or trade credit insurance) alone is already being characterized as a growing market in Canada by Euler Hermes, a global leader in trade credit insurance, surety and related risk services.

Yet, before shelling out for a new policy, Delon urges companies to factor insurance into the last stage of their risk management practices, not the first.

“There’s a lot of good insurance products out there, but before companies do that, they should first try to manage the risks by segregating or diversifying,” he says. “What you have after that, the residual risk, then might be something you want to insure because it’s economically feasible.

“Businesses that purchase insurance at the initial stage are not insuring their risks. They are just financing them. It’s best to first figure out what your risks are that you want to finance, and the go into the market to finance them. That’s the correct order.”

When it does come time to consider some form of political risk insurance, Anne Kleffner, professor of risk management and insurance with the Haskayne School of Business at the University of Calgary, says traditional coverage has addressed risks primarily around confiscation, expropriation and nationalization of assets.

Coverage can also cover export/import embargoes to cancellations of export/import licences – a situation all-too familiar to Canadian canola farmers after China banned seed-based imports to the country earlier this year.

Other coverages include physical damage to assets from political violence, termination of or default on contracts, non-delivery/non-shipment of goods, forced abandonment or divesture, and non-payment by government or government-owned entities of trade-related debts to financial institutions.

“There are many different types of insurance that cover many different types of losses,” says Kleffner. “For example, political violence insurance covers things like civil unrest and terrorism. Companies might consider buying this type of insurance if they had operations in North Africa or the Middle East.

“But then there’s also coverage for expropriation and confiscation. Those tend to be much less of a risk in many places today. We used to see these types of expropriation risks in South America, but it’s kind of gone out of fashion.

“Political risk insurance is like a property insurance policy where you can decide which causes of loss you want to cover, whether it’s floods or earthquakes. Political risk insurance is the same idea. Depending on whether you’re operating in Ukraine versus Turkey, you very well may make different decisions.”

In the case of Euler Hermes, it focuses on what it calls short-term receivables insurance, which is essentially bad debt protection as a result of non-payment. It protects companies selling domestically or abroad from situations where they cannot be paid such as a default on payments or protracted default (slow pay).

The political risk component of this insurance also covers currency convertibility and transfer risks, notes Euler Hermes North America CEO David Dienesch.

“Let’s say somebody has the money to pay you in their local currency, but just can’t convert that to the contract currency, which, let’s say, is Canadian dollars. And even if they can, they just can’t get the money out of the market. Political risk insurance covers that aspect of it,” he says.

Other companies such as Atradius Canada do not offer political risk insurance on a stand-alone basis, yet do cover trade credit risks through comprehensive insurance that covers all risks relating to payment of goods and services.

“Comprehensive coverage is any reason why a customer in Canada, the exporter, is not paid. In that case, we pay,” says Chris Short, country manager for Atradius, which specializes in trade credit insurance, surety and collections services.

Another consideration when choosing a type of insurance is to consider the country where the company will be operating. What’s the grade of that country? Is that country too high of a risk? Are there other countries that are good choices where you wouldn’t have to even buy insurance to go into that country?

“Factors such as political uncertainty and instability are generally what companies need to be concerned about, and what sort of attitude the government and country has more generally toward foreign investment,” says Kleffner.

Dienesch adds that when researching on where to do business abroad, look at events in the past within that country (or countries) that could repeat itself.

“Has there ever been an incident in that particular country that you’re looking at where a confiscation or expropriation or nationalization occurred? That puts that particular country in a bad light,” he says.

In Canada’s case, experts agree the country is still viewed globally as a favourable place to invest.

Euler Hermes currently ranks Canada as AA1, and low risk for enterprise. Its strengths include political stability, high per capita GDP, a strong banking system, and large oil and gas reserves.

Weaknesses include sensitivity to commodity prices, high exposure to the U.S. economy and government revenues dependent on oil.

AM Best Rating Services, meanwhile, ranks Canada as a CRT-1. It noted political risk was “very low,” yet also stated federal and provincial governments have been strained – particularly in Alberta – and that varied regulations between provinces could lead to domestic trade barriers that could impede growth.

“From the outside looking in, the Canadian economy is pretty well established and therefore generally a good place to do business if you’re a foreign company looking to invest,” says Short.

“One of the common things we focus on when talking about political risk is: how easy is it to get your investment out or get your money out or get paid for what you do based on the current government? When it comes to that, Canada is a good place to do business. What you see is what you get.”