Credit insurance - Credit claims on the rise

In November, Woolworths announced that it was to go into administration. This failure was followed by a profit warning from credit insurer Euler Hermes, with the liabilities from the collapse of Woolworths costing the firm around £44m.

Projections from Euler Hermes for 2009 are no more optimistic. It expects 34.2% more bankruptcies in the UK than in 2008, while statistics from the Association of British Insurers show that, in the third quarter of 2008, the number of credit insurer claims increased by 34% and the value of these claims increased by 58% from the same period in 2007.

Forecast

Stuart Lawson, head of trade credit at Aon, remarked: "All the evidence says corporate failures will increase further, therefore claims will also rise. Premium rates have been soft for a few years, so there has to be a market correction to reflect the level of risk. Higher risk sectors such as finance and construction will see premiums rise considerably more than others. Brokers need to ensure the rate secured for the client is the most competitive that can be achieved for the right level of cover and service. More technical brokers will have an opportunity here to differentiate themselves."

Martin Holland, managing director of Heath Lambert's credit insurance division, commented: "It may be impossible for some clients to place due to poor debt records and exposure to high-risk industries such as car manufacturing, though most will be picked up. Insurers are approaching business differently, with more rigorous underwriting on policies."

Taking a long-term view is important, argues Jeremy Hughes, European head of trade credit and surety at QBE: "In any business sector there are good and bad companies. We expect more than 95% of companies will still be trading at the end of the recession, so it is important to keep things in perspective. There is no sector we would ever deem uninsurable."

Amlin, though, has already decided to pull out of the market. Most credit insurers are global players, hence suffering across many markets, however Holland said that Amlin's withdrawal is an exception: "Amlin was a small player in the marketplace; most big players in this space are credit insurers only and therefore unlikely to withdraw."

Prospect

Hughes believed that tailored underwriting could be the future for the credit insurance market; enabling brokers to secure good quality cover at a reasonable price even when the economy suffers. He said: "Credit insurers have been criticised for being too boom-and-bust with their rates and limits. Many are looking for more ratings stability."

As many businesses face well-publicised cash flow problems, brokers and insurers have had more requests for credit insurance quotes. Aon said that credit insurance enquiries rose 20% in 2008 - a trend that is set to continue. Hughes explained: "More businesses look to take out credit insurance in a downturn. Not only do they look for cover in the event that companies they work with go bust but also for direction from experts to provide informed analysis on their customer bases."

Lawson agreed that, if the market adjusts to cope with higher levels of claims, the future is rosy for credit insurance: "Insurers are still writing more cover than they were at the start of 2008, despite the high-profile problems that they have been facing. Credit insurance is still an incredibly valuable product, it just has to adapt to the market we are working with."