Dude Where is Our Plane? OR Thinking About Government Involvement in Credit Insurance

In Canada, the Export Development of Canada is the primary export credit insurer for businesses, especially small businesses.  They recently developed an online product that provides for real-time quotes called EDC Select Credit Insurance.

According to their website, its ideal when:

  • You’re a new or occasional exporter
  • You’re exploring new markets and relationships with a few customers
  • You need fast and simple coverage exclusively online
  • You need to insure transactions under $500,000

With EDC Select Credit Insurance, if a customer doesn’t pay you, EDC will cover 90% of your insured losses.

You can try the online quote process out here

For example, if you have a $25,000 sale to a Pakistan buyer on 180 day terms, and expect to be paid within 180 days , the cost is no more than $610.

Pretty cool, right?

Expect it got me thinking.  There are some technical and structural issues here.  For example, the easy question is if this insurance covers unpaid invoices, how is that defined?  What happens under a dispute between buyer and seller?  How is unpaid defined?  I reached out to the EDC about this particular point and am still waiting for a Trade Advisor to call me back.

But then it got me thinking even deeper.

For example, what happens if every dollar of exports out of Canada is covered by EDC, is that possible?  On the surface it looks great; get subsidized taxpayer coverage for small business to cover their risks.  But the involvement of the Government in markets has negative consequences on the private sector market – it reduces margins so the price of insurance is driven down ... and therefore less is underwritten by the private sector.  We also know that the Government is left with risk that the private sector will not insure.  I mean the EDC is dealing with a very public case right now where it lent $41M to a family to buy a private jet and now the jet is missing.  You cant make this up, its really a Canadian version of Dude Where is our Car. see  Washington Post article

So if the Government is not going to have an open balance sheet to subsidize any risk, how does it set limits, and how does it decide how to apply those limits?  For example, if they will only underwrite say $5 bn in risk, is it the first $5 bn that applies?

Look, I think its great for Governments to help exports.  It’s done globally.  But programs need to be transparent.  If the Canadian, or Chinese, or American Governments want to cover every $ of exports – good idea, I cant argue with it, but it needs to be transparent.

But just make sure you track those planes!

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First Voice

  1. Michel Fontaine:

    The private sector is much cheaper that EDC. But in many cases, private insurers do not want to cover single buyer policies. Additionally, this is not a gift from EDC, of from any other export credit. It is an insurance and the premium covers the risks.

    Private insurers will move out of a market to stop insuring all together i.e. auto industry in 2007, this is where the credit agencies can make a difference. If a SME goes down it will not come back. The rest of the world has credit agencies, even if it is used mostly for large companies, it still create jobs and help the economy.

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