Credit insurance 'triple whammy' for business

Trade credit insurance that protects companies if their trade customers go bust is becoming increasingly hard to obtain, causing problems along the supply chain and for insolvency specialists.

Businesses use trade credit insurance to cover themselves from the threat of the companies they trade with on credit terms going insolvent or putting off payments for a protracted length of time.

Insolvency practitioners, credit ratings experts and an insurance partner at a Big Four firm said they have all seen more cases of credit insurers refusing to provide cover.

‘It’s a triple whammy effect,’ said Martyn Williams, managing director at credit reference agency Graydon, said: ‘There is very little credit insurance cover, slow payments from trade suppliers and no credit from the banks. Inevitably this will lead to more business collapses.’

The worst hit sectors continue to be retail, construction and property, added Williams.

The government has also raised concerns about the scarcity of credit insurance. The UK’s business minister has met with the big three credit insurers ­ Atradius, Euler Hermes and Coface ­ to discuss the possibility of a state guarantee to underpin the sector, the Financial Times reported.

Nick Hood, a partner at Begbies Traynor, an insolvency specialist, said struggling companies that fail to get credit insurance are less attractive to potential buyers, making it much harder for insolvency practitioners to sell the business.

Withdrawal of credit insurance creates a domino affect along the supply chain, according to Mark Winlow, partner in the general insurance advisory unit at KPMG. This is because companies that fail to buy insurance against supplier payment defaults or collapses often sever ties with suppliers who are judged high risk.

‘There is increasing concern that insurers which provide cover on trade credit risk are declining business,’ he said. ‘Anecdotal evidence points to businesses being refused cover by credit insurers and, as a result, some of these businesses are refusing to trade with counterparties where the risk is too great for a business to bear itself.’

Credit insurers who are struggling to remain profitable should consider increasing premiums and changing terms and conditions as an alternative to pulling cover,’ Winlow added.

‘Perhaps [credit insurers could] apply the old adage that there are no bad risks, just badly rated risks,’ he said.