Co-op case highlights need for credit insurance

Media reports that suppliers have been taking out trade credit insurance on the Co-operative Group should be viewed as a positive development rather than an indication that the company is on its last legs. But it is when insurers no longer make credit insurance available on an organisation that there should be cause for concern.                  

Credit insurance, which refunds suppliers if the firm they are selling to can’t pay them, is in place on most UK retailers and many of these are not in any financial trouble. Indeed, it is most commonly offered as a whole-turnover product via which the insured supplier obtains credit cover for its whole debtor book.

AIG head of UK Trade Credit Will Clark says: “Companies who have a trade credit insurance policy are generally looking to better manage their receivables, and it is seen as a positive sign that they protect one of the most valuable assets on the balance sheet. Banks, for example, look at companies that have trade credit insurance more positively as a risk in order for them to provide working capital.”

Impact on insurance industry

Insurers and brokers acknowledge that the adverse media publicity in 2013 surrounding both Co-op Bank chairman Rev Paul Flowers and the restructuring of bond debt has seen demand for credit insurance on the company increase at a faster pace than for other retailers during the past 12 months.

But they also stress that it’s important to distinguish between this and high profile retailers that have become insolvent in recent years.

Aon Trade Credit managing director Stuart Lawson says: “As soon as you mention restructuring of bonds it raises a red or amber flag. But you can’t compare this with cases like Woolworths, Comet and Blockbuster where everyone could see their business models weren’t sustainable.”

Markel International underwriter and senior credit analyst Simon Philpin says: “We are comfortable on the Co-op going forward. The vast majority of problems occurred within the bank, not on the food side, but insurance on the food side has increased by association.

“Demand for credit insurance has eased since late last year when the bank side demerged from the food side and particularly this August after the Co-op sold off its farm and pharmaceutical sides. It’s probably still higher than for most other retailers but the food industry is a much safer place to be than some retail areas.”

The presence of trade credit insurance should actually aid the Co-op’s recovery by providing suppliers with valuable reassurance and information. The insurers have invested heavily in their analyst teams during recent years and the quality of their risk ratings has become much more transparent.

Credit Risk Solutions co-founder and director of specialist broker Mike Clark says: “The issue for a lot of the Co-op’s suppliers is that it’s hard for them to understand the creditworthiness of a highly complex business with a profile that’s changing all the time. But the information offered by credit insurers can provide a very useful tool for measuring risk.”

Boost to retail credit insurance

The publicity surrounding the Co-op is widely considered to have boosted demand for retail credit insurance as a whole as suppliers who didn’t previously have any cover have decided they would like the company to form part of a broader credit insurance package.

Retail is therefore destined to remain the largest UK trade credit insurance sector. Within Atradius it currently accounts for 21% of UK exposure, which is nearly twice the size of the next largest sectors – construction and electronics.

This high demand is due, in part, to the diverse range of suppliers that retailers have always had and, in part, to their increasing vulnerability during recent years.

In 2006/7 some retailers expanded too quickly and a lot of this expansion was financed by debt. Since 2008 the sector has also suffered both from a slowdown in consumer spending and from the inability of many firms to switch to online offerings.

Figures produced by the Centre for Retail Research suggest that retailers’ problems are far from over, despite the recent pick-up in the economy.

Although the numbers of retailers failing reduced from 54 in 2008 to 26 in 2010 they increased again to 54 in 2012 and reduced only marginally to 49 in 2013. 

Furthermore, 35 failures had already been recorded for the period to July 2014.

But, on the positive side, the size of the companies failing is becoming much smaller on average. The 54 failures in 2008 affected 5,793 stores and 74,539 employees whereas the 35 failures to this July have affected only 722 stores and 6,184 employees.  

Simon Rockett, head of UK risk underwriting at Atradius, says: “Demand is high for trade credit insurance in this sector and the trend so far in 2014 has been encouraging. Retail businesses failing during the last year have tended to be relatively small and to be repeat offenders.”