With the collapse of Woolworths and other high street stalwarts, trade credit insurers were accused of pulling away the umbrella as soon as it started to rain. But having paid out record claims of £320m in 2009 alone, the industry is now facing forward with some lessons learned
With the possible exception of Ronan Keating and Ashley Cole, it’s hard to imagine anyone that has suffered worse press coverage recently than the trade credit insurance industry.
Over the past two years, credit insurers have been accused of exacerbating the problems faced by recession-hit businesses and forcing many firms to the wall after withdrawing cover from thousands of companies at the height of the recession.
The nadir came when credit insurers were blamed for the collapse of high street national treasure Woolworths in 2008. Between September and October of that year, the sector’s big three – Coface, Euler Hermes and Atradius – all withdrew credit insurance cover from the loss-making retailers’ suppliers.
Within weeks, Woolworths was in administration and the industry was garnering the kind of headlines usually reserved for either Fred Goodwin and his colleagues in the UK’s banking sector, or unsuccessful England football team managers.
Yet, unlike Britain’s banks, the credit insurance industry got through the financial crisis without having to be bailed out by the taxpayer and, along the way, paid out claims worth a record £320m in 2009, almost double the amount paid in 2008. Indeed, the government’s much-touted but short-lived top-up scheme to help businesses denied credit insurance was such a disaster it was closed at the end of last year.
Small wonder, then, that after licking their collective wounds gained over the past year, credit insurers are using buzzwords like ‘better communication’ and ‘transparency’ as they emerge from the shadows of recession to bask in the warmth of the fledgling economic recovery and a sharp reduction in claims over the past eight months.
“A lot of the negative media coverage we received was basically blaming the weather man for the weather,” Euler Hermes UK chief executive Fabrice Desnos says. “We highlighted that the situation was worse than expected, and we have been proved right.
“But the image of the industry has been damaged. We could have communicated things better, but that is a lesson we have learned and we are now bringing more transparency to the market.”
That view is echoed at rivals Coface and Atradius. “We needed to adapt our business model, but what occurred during the crisis was necessary,” Coface UK and Ireland managing director Xavier Denecker says.
“We had to reduce our cover because we were unable to increase premiums as reactively as was necessary.
“Now we must make sure clients are paying for the cover they get, incorporating the total exposure and intensity of risk. That means, in future, credit insurers must show how we make our decisions. Transparency is key.”
To this end, Coface has started giving its customers a credit score for the businesses they are supplying in a bid to explain more clearly policies on pricing and decisions to restrict cover.
“It means that, if we enter a good period, we can discuss providing more cover for less premium. But if we enter a crisis period, then clients can either choose more cover with more premium or to maintain the same level of cover,” Denecker says.
He adds that the new system has met with strong approval from clients because it allows them to challenge Coface if they believe the insurer is being too pessimistic about their buyers. A successful challenge could result in the premium and cover being amended within seven days.
But while the big three credit insurers are falling over themselves to engage in more ‘transparent dialogue’ with clients, the new touchy-feely policy is also being led by clients, according to Keith Swain, director with broker Henderson, which expanded its involvement in credit insurance last year after acquiring Swain’s business, UK Credit Insurance Services.
He says companies that want credit insurance are providing more up-to-date information to credit insurers in order to get cover. “That has allowed underwriters to relax their conditions a bit, which has helped improve the market,” he says.
Swain’s view is confirmed by Desnos: “Two years ago, buyers of credit insurance were reluctant to share information with credit insurers, but now there is a greater understanding of the fact that we are key stakeholders, and they engage with us in a more open way.”
While the big three look to greater transparency to avoid a repeat of the debacle of the last two years, they have also cast their eyes towards higher premiums, or ‘more realistic prices’ against the backdrop of the still fragile economic recovery. Businesses say credit insurance premiums have spiked by around 30-40% this year and even doubled where there have been claims.
“All credit insurers have been looking to increase premium rates consistent with the amount of claims that have been submitted,” Desnos says.
“Market prices are now reflecting the current shape of the economy, whereas two years ago prices in the market were reflective of the previous 10 pretty benign years.”
In truth, premiums have risen from a ridiculously low level. It’s estimated that, for every pound spent on credit insurance in 2001, there was £200 of risk written. In 2008, that figure had risen to £500.
But despite the improved premiums, it’s worth pointing out that, with more than a few storm clouds hanging over the nascent economic recovery – the government’s spending cuts and the Greek-inspired fall in global markets to mention just two – businesses are still likely to suffer a reduction in cover if their customers suffer weak trading in future.
Yet, despite this, the need and demand for the product is rising, because companies still have to be wary of putting themselves into difficult situations if any of their clients become insolvent.
“The overall improvement in the economy isn’t universal yet, and that is likely to give us further opportunities,” Atradius’s UK and Ireland head of risk, Marc Henstridge, says. “An increase in interest rates has the potential to cause more insolvencies, particularly among those businesses that are surviving purely because of low interest rates.”
But some insurers are looking at other business models to entice those disillusioned with credit insurance. One of the lessons learnt by many companies in the past two years was that, when their cover was withdrawn, they were also left without any in-house expertise to manage their accounts receivable portfolios.
This has prompted a rare, and so far sole, new entrant into the market in the shape of Markel, which is hoping to cash in on those businesses that were burned by the decisions of whole turnover credit insurers by offering excess of loss cover (see box, left). Markel will be joining ACE and Chartis in what is the minority end of the market. Indeed, Markel’s decision to gatecrash the party led to it poaching a large chunk of the experienced credit insurance team at ACE.
“Coming through what was a painful process has made a lot of medium-sized to larger companies realise that having some in-house expertise is not a bad idea,” Markel’s credit insurance division managing director, Ewa Rose, says. “Larger companies are now looking for captive solutions, building up their expertise and keeping more risk in-house. So our type of cover is very much in vogue at the moment.”
But even allowing for the turmoil of the past two years, it’s unlikely to pose a threat to the established model of whole turnover provided by the big three, which between them account for more than 80% of the UK market.
While there will always be a need for an alternative form of credit insurance that transfers more of the risk onto the customer and therefore costs less, it is only going to appeal to those businesses that are big enough to provide their own sophisticated analysis of their suppliers.
“The vast majority of our customers don’t just want the insurance, they want the information,” Henstridge says. “The volume of insolvencies are in SME to the mid-market. What we’ve been able to do is identify the economic and insolvency trends that have allowed us to come back on cover for various sectors and sub-sectors, rather than just carte blanche for an industry. Now we’re getting it down to an individual buyer basis.”
Desnos adds: “Clients who value the whole turnover proposition tend to value the risk management aspect. It’s altogether different from excess of loss. Self-insurance is probably our biggest competitor, but if you look at how many clients are using credit insurance as a tool, you’ll see it has actually increased.”
However, Rose insists her goal is to increase market capacity, not prise clients away from the established players. “Our aim is to expand the market. We haven’t set out to compete with the big three players. There may be some policyholders that move from whole turnover to excess of loss, but there would be a transitional period before that happens. We’ve set out to get ‘new’ new business, rather than take business off the other players.” IT