Trade credit insurer squeezes cover

Euler Hermes, the UK’s largest trade credit insurer, has warned that business
cover against customers going bust could be slashed unless customers use its own
credit checking service.

Under standard policies, companies are guaranteed trade credit cover to a
certain amount, known as the ‘discretionary limit’. However, Euler Hermes has
said it will cut this automatic cover by 30% from the start of this month unless
companies pay to use its credit report service to check their customers’

The company is also cutting the length of time credit reports are valid from
12 months to six if a customer makes use of another credit report service when
vetting customers.

The tightening of insurance cover could not come at a worst time for UK
businesses, with a raft of companies going bust amid the economic downturn and a
general withdrawal of credit.

The UK government was this week finalising a multibillion-pound loan
guarantee package for small and mid-sized businesses.

‘The rapid decline in the availability of credit in the market over the past
12 months has meant that it is no longer prudent to rely on historic trading
experience,’ Euler Hermes’ commercial director James Daly wrote in a letter to
customers dated last month. ‘In line with the above, we would like to inform you
that changes to discretionary limit cover will shortly be introduced.’

He added that the changes to the terms were a ‘prudent step’ in helping
customers manage their credit risk.

Trade credit insurers have been criticised recently for pulling wholesale
cover from entire sectors.

One insolvency practitioner said that the squeeze on trade credit insurance
could be a serious blow to struggling businesses.

‘The insurance is one of the fundamental building blocks of trading a
business,’ the practitioner said.

Trade credit insurance is vital if companies wish to carry on trading, but
the tougher insurance climate also causes major headaches for insolvency
practitioners in their efforts to sell a business as a going concern.

Property, retail and construction are the sectors that insolvency
practitioners have flagged up as being most at risk.

Euler Hermes said: ‘The information on First Source on which we base our
underwriting decisions is more accurate and more reliable and such decisions are
less likely to result in a claim.’

Stephen Alambritis, head of public affairs at the Federation of Small
Businesses, said Euler should have waited for the government’s bailout package
before taking the decision. ‘We feel that [Euler Hermes] have jumped the gun.
Now is the time when the insurers should be offering an umbrella to companies,
not taking it away.’

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