Trade credit recovery in the balance

Research by the British Retail Consortium has shown that 38% of large and 28% of small and medium-sized retailers have reported the reduction or withdrawal of trade credit insurance as having a negative impact on their businesses. According to BRC, 92% of large firms and 74% of SMEs surveyed feel that trade credit insurers do not assess risk accurately.

The news came in the same week as the Association of British Insurers announced the first fall in trade credit insurance claims for a year; the total number was 5,661 - a decrease of 1% from 5,702 in the second quarter of 2008 - with the value increasing 17% to £81m.

Tom Ironside, BRC's business environment director, commented: "It's vital to retain trade credit insurance. If it's withdrawn, suppliers demand to be paid upfront. This can cause cash flow problems for retailers, leading them to cut jobs and stock as they divert money to pay suppliers."

In October 2008, brokers found that the decline in premiums over the past seven years was suddenly ended and that trade credit insurers were taking centralised decisions on withdrawing insurance in sectors such as haulage, retail, construction and manufacturing.

Steve Foulsham, technical services manager at the British Insurance Brokers' Association, commented: "Our feedback from our members was that, in around 90% of cases, brokers found cover was being withdrawn, not reduced. Many profitable businesses were left vulnerable by being in the wrong sector and they are still vulnerable."

Government scheme

One effort taken to address the issues was announced by Chancellor Alistair Darling in his April Budget when he revealed a trade credit insurance scheme. Despite recent changes, only 58 have been sold. Only businesses experiencing reduced cover can apply, not those for which cover has been removed.

Xavier Denecker, managing director at Coface UK and Ireland (one of the companies involved in the scheme) argued that the industry has responded well to the problems of a year ago. He said: "There is no reason why we would not insure a company in a difficult sector with a good credit management team and procedures. We have no exclusion by sector."

It is a point backed by Martin Holland, managing director of credit and surety at Heath Lambert: "I think the rigidity of approach and carte blanche withdrawing of cover has ended. We are now seeing a more scientific approach to what limits are being written and it [rigidity] has eased off quite considerably."

There is some consensus that the market has bottomed out and is moving towards a more positive outlook.

As Foulsham concluded: "We may be starting to see some green shoots from the major players but it is an embryonic change that has some way to go to restore business confidence in the market."

Government trade credit insurance top-up scheme – selected features

• The upper limit has been raised to £2m.

• Eligibility for the scheme is backdated to include those companies that had their credit limits reduced on or after 1 October 2008.

• Up to 28 days’ retrospective cover can be purchased.

• The price of the top-up cover has been reduced from 2% to 1% of the value of the cover.

• The minimum threshold of £20,000 for purchase of top-up cover has been removed and is open to new applicants until 31 December, 2009.

• The duration of each policy is for a maximum of six months.

Source: businesslink.gov.uk