The credit insurance market is in trouble, but the government can’t solve all its problems
The government is likely to intervene soon in the distressed credit insurance market; the result of mounting pressure to provide a state-backed scheme to enable businesses to keep trading after credit insurers have pulled cover.
Lord Mandelson, the business secretary, and his team have been in discussions with a number of credit insurers over such a measure, although it is not yet clear what form any intervention will take. A comprehensive state guarantee has been dismissed, with ministers looking at more targeted intervention. The government may provide – at a price – additional cover for companies in the form of permanent credit limits or top-up cover.
The move is not without precedent. In November, France became the first major economy to offer state-backed credit insurance, with Caisse Centrale de Réassurance providing additional credit insurance for companies that have had their cover reduced.
But the UK government is wise to reject a comprehensive state guarantee. The state is not equipped to become a standalone credit insurer; it does not have the underwriting expertise and the cost of effectively insuring the workings of trade would be immense for taxpayers.
Mandelson is keen for any intervention to be effective, warning recently that there were significant barriers to offering government guarantees. “It’s difficult to design an intervention that would make a substantial difference. We have to look at whether the marginal difference would be justified or whether it’s not worth the candle.”
Some credit insurance experts say a government scheme is feasible. Aon, for instance, argues that a scheme could work if it guaranteed permanent credit limits for businesses where cover is already in place. But there are potential downsides.
First, the provision of state-backed insurance cover could exacerbate the problem it is attempting to solve. Government intervention may accelerate the withdrawal of cover by credit insurers looking to shed risk from their balance sheets. Such a move could further damage the reputation of the credit insurance market – Amlin’s withdrawal from the sector in November (it had a 4% share of the UK market) was a major blow.
Although demand for credit insurance is rocketing, brokers are concerned that clients could lose confidence and buy less cover, accepting a higher level of self-insurance.
Credit insurers have to some extent brought this situation on themselves as, in the past, they have underwritten business too cheaply to grow market share.
According to statistics from the ABI, insurers wrote £334m of premiums in 2007, covering £282bn of sales by British companies. As one commentator notes, this means insurers were receiving premiums equivalent to the turnover of a medium-sized business to protect more than 20% of the output of the entire British economy.
These decisions have come back to haunt them. The economic downturn has sent loss ratios soaring, prompting credit insurers to purge their books of high-risk business.
The credit insurance market must learn from its mistakes – and start by taking a hard look at its underwriting. Increasing premiums and changing terms and conditions may be a better alternative than pulling cover. There is a market for cover at the right price. If premiums are attractive then new capacity will enter the sector.
The credit insurance sector now has the opportunity to be part of the solution to the economy’s woes, not part of the problem. Government intervention must be a short-term measure only.
â€¢ The government is looking at steps to increase the availability of trade credit insurance to businesses
â€¢ Targeted intervention is likely, rather than a comprehensive state guarantee
â€¢ A scheme guaranteeing permanent credit limits is workable
â€¢ Government intervention has downsides for the credit insurance market
â€¢ Credit insurers must address damage to the sector's reputation