Small to medium-sized businesses should consider credit insurance - it's not as complex as it seems. Kathryn McCarthy reports.

Credit insurance covers businesses against financial loss caused by the failure of their customers to pay the debt owed for goods or services supplied. It's a straightforward concept; however, the sector has been held back by the historic complexity and lengthy paper-chase involved in taking up the cover.

Although much has been done to improve products and policy wordings, credit insurance is still seen as a complicated product and many small businesses are not aware of the cover at all. General brokers aren't tapping into it because they have insufficient knowledge and often place credit insurance in the specialist arena.

Small businesses are often the most vulnerable to bad debt, yet only a tiny proportion of small to medium-sized enterprises (SMEs) insure against this exposure. But the internet looks set to change this position as it opens up new ways of delivering simplified products which can be bought and administered online.

The first online provider
A year ago, was launched as the UK's first provider of online credit insurance. It was set up to serve SMEs that do not want to insure their whole turnover. Single-invoice cover has been available online since December and single-buyer insurance has just been launched, protecting companies for a given period against a customer going bust or failing to pay in reasonable time.'s chief executive David Neckar says: "Credit insurance is a topical area because a lot of people are taking more notice of negative news on the economic front."

But he says a lot of people don't know enough to buy the cover and brokers have regarded it as a difficult area. "According to our market research, two-thirds of smaller companies haven't heard of credit insurance."

To write credit insurance for SMEs, huge amounts of data on thousands of companies is required, which was historically a barrier to serving this end of the market. But two things happened to change this - electronic information came about so external data could be used in underwriting the risk, and the development of the internet.

Susan Ross from Aon Trade Credit agrees that penetration is currently low within the UK's SME sector. "Companies may find that credit insurance, rather than being expensive and complex, is now an accessible and cost-effective tool. By using it, a company can outsource its buyer information purchase, evaluation of credit limits and even its credit management and overdue debt collection, while at the same time protecting itself against the risk of bad debt. Protecting the profit margin means the business is protecting its backers, both equity providers and lenders, while leaving the managers to concentrate on growing their businesses."

The impending global economic slowdown will undoubtedly bring more inquiries into credit insurers from UK businesses. According to one business report, the number of publicly quoted companies going bust in the first quarter of this year has already topped the figure for the whole of last year.

"The moral is that being a plc isn't a guarantee," says Christopher Wirth, underwriting manager at Hermes Credit & Guarantee. "Quoted companies tend to be stronger and financially more viable because of stock exchange regulations. But companies that are perceived to be strong shouldn't be shortsighted, as insolvencies are increasing. The writing was on the wall as early as September last year."

Indicators in the UK are that exports will continue to be affected by the strong pound. "Strong consumer confidence is pulling in imports and we are seeing record trade imbalances," says Ross. "There are concerns that the US, following a period of high economic growth and high productivity, will become a high-risk market."

Facing instability
In light of the shaky economic scene, more trading companies are researching credit insurance. "If companies wait to buy credit insurance until we are in the throes of recession, premium rates may have risen to reflect the higher level of claims," Ross warns.

As economic factors fuel demand for credit insurance, forecasting is an important consideration for credit insurance underwriters.

"In terms of economic forecasts, we have a risk team responsible for assessment of economic and sector exposure," says Keith Baxter, manager of credit and bonds for Profin, part of Royal & Sunalliance Group. "The team looks at economies and drills down to sectors and can also look at large companies within a sector. We use a variety of public and private sources, and also use underwriting and customer feedback and intelligence. We spread our net wide to get the best information."

Baxter says there is an upward trend in frequency and severity of claims between 1997 and 2000. "While we don't have figures for 2001, I don't think things have got any better. From the purchasers' point of view, now is a good time to buy, as the likelihood of having a loss is significantly higher than four years ago."

The credit insurance market is undoubtedly becoming more sophisticated and policy wordings are now in plain English, where at one time they were full of jargon. "Underwriters have tried to make it as simple and understandable as possible," says Wirth.

As for the future, globalisation will feature heavily in the sector. "Most underwriters are now part of larger groups," continues Wirth. "Policies can be underwritten here and issued on the other side of the world, which is especially useful for large international companies that want worldwide cover issued in any country in the world. This is all due to technology and accessing data and information online from lots of sources. The credit insurance sector is taking advantage of modern technology."

The internet is revolutionising the way insurance products are designed and sold, helping more businesses get access to and benefit from credit insurance. With the likelihood of a recession around the corner, more companies will turn to credit insurance as a way of protecting themselves against business failures among their customers. case study
Coverclick was founded by a group of experts in credit insurance and credit information.

Chief executive David Neckar had previously worked for Amlin, Euler Trade Indemnity and in senior positions within the Lloyds' Market.

His co-founding directors are Graham Daborn, formerly of Dun & Bradstreet; and Robin Jootun and Vanessa Edmonds, both formerly with the Euler Group.

June 2000, formed with the mission to help protect small and medium-sized enterprises (SMEs) in a simple and cost-effective way.

It obtained capital backing from Royal & Sunalliance Group (R&SA)

December 2000 - went live as UK's first-ever online credit insurer

March 2001 - active marketing of Single Invoice Insurance began

June 2001 - Single Buyer Insurance launched following success of initial service

June 2001 - Coverclick available to users of (owned by Barclays and Freeserve)

July 2001 (scheduled) - Coverclick obtainable through Lloyds TSB Solutionsplus website for business customers.

Creating a new niche: a solution to the smaller businessperson who wants simple, quick and affordable credit insurance by allowing the buyer to adopt a selective approach.

The new product Late Payment bundles certainty of collection with insurance cover (pays in 60 days, whether buyer goes bust or not).

It has also adapted a direct internet product to the insurance broking community that can refer their clients safely to coverclick.