One indirect way for brokerages to protect their receivables during the pandemic

On the heels of an ominous Canadian Federation of Independent Business survey last month that shows 12% of Canadian small and medium-sized businesses owners are considering bankruptcy or winding down their business because of COVID-19, brokerages can protect their own receivables by protecting the receivables of their clients, says a credit insurance expert.

Receivables insurance is something all commercial brokers should be discussing in their meetings with clients, according to David Dienesch, board chairman of the Receivables Insurance Association of Canada. He talked about the option during Canadian Underwriter’s webinar, COVID-19 and the Economy: Protecting Your Receivables.

Receivables or credit insurance not only protects brokers’ clients, but also the brokers themselves from possible errors and omissions claims made against them, explained Dienesch, president and chief agent of Euler Hermes Canada, a credit insurance company.

“And the reason I say that is, one in four companies goes bankrupt because one of their customers went bankrupt,” he said. “So it ties in, in a sense, for the brokerage. If [the brokerage has] a client who has a customer who goes bankrupt, there’s a 25% chance that that client won’t be able to pay their bills to the brokerage.”

Apart from the indirect protection a brokerage may have because their clients are insured against credit risk, Dienesch listed two other important reasons why brokers need to talk to their clients about protecting their receivables.

“One of those is, you’re doing a great service for your client,” he said. “But also, you have to remember that you have an E&O exposure if you’re not talking about this product to your clients.”

Clockwise from top left, David Gambrill of Canadian Underwriter, David Dienesch of Euler Hermes Canada, Karen Ritchie, of Baird Macgregor Insurance Brokers LP and Nancy Babeu of Primaco during CU’s webinar.

Dienesch recalled a time when he was a broker for a major brokerage’s national credit practice. He said a client came to his team and reported that a customer had gone bankrupt. The client claimed they had never been recommended credit insurance.

“Our executive team was extremely nervous about it, because they were a very large client and it was a very large loss,” Dienesch recalled. “At the end of the day, we were able to, without a doubt, prove that we had spoken to them about credit insurance. Unfortunately, they didn’t buy.”

Receivables insurance — also called trade credit insurance — has picked up steam as a result of the COVID-19 pandemic, which has forced some businesses to close, suspend operations or run in a limited capacity. Some businesses haven’t been able to pay their bills, including insurance premiums, which is hurting brokerages that have to then turn that premium over to the insurance companies.

“It’s the right time for brokers to get involved,” Dienesch said. “Any broker can sell receivables insurance.”

And with the way the pandemic is going, it could be a while until companies are back on their feet. “On average, it takes five to eight quarters to recover [from a recession]; that’s the average,” Dienesch said. “We’re seeing, in our industry sector, a ton of extra demand out there.”

Feature image by iStock.com/sesame