Last year, trade credit insurance payouts hit their highest level in nearly a decade, with claims costs running at the equivalent of £4.3m every week.
This, coupled with several high-profile company collapses seen since the start of the new year, has pushed the world of trade credit insurance back into the spotlight.
Post explores the state of the market.
Last year, the equivalent of 212 firms every week were helped by trade credit insurance, according to the Association of British Insurers’ UK Trade Credit Data Report.
In conjunction with rising claims costs, a record £340bn of UK trade is now being covered by trade credit insurers.
ABI trade committee chair and head of credit and surety at QBE European operations Trevor Williams said: “Demand has become greater. It reached its peak in the number of policies issued in 2008. After that it fell away and has been picked up again in the last couple of years.
“Why is that? Because the product itself is probably is at its cheapest level ever. Therefore, when the product is bargain basement, people will buy it.
“The insurance market generally has seen a huge increase in competition in the last few years, because interest rates being low has allowed funds to look for a home and a return.
“If you can’t get a return in the normal capital markets, you look to other markets and insurance has been one of those markets where you’ve seen a lot of new players. That means competition, and that means prices go down.”
He added: “I see the trend of uptake of insurance in this particular class continuing. But we’ve hit the bottom of the cycle in terms of pricing.
“We’re starting to see capacity in specialist areas of insurance moving away because interest rates are on the rise. The public perception of risk is also increasing. Insolvencies are on the increase as well.”
Tim Fisher, managing director of trade credit at Gallagher, said, however, that increased interest has not yet necessarily translated into greater uptake.
“According to figures published by the ABI, neither the number of policyholders nor people buying credit has increased, but interest in the class is undoubtedly growing,” he said.
“Timing is important however. It is not unusual to receive enquiries into the availability of trade credit insurance once a company’s financial difficulties are already in the public domain.
“This is obviously too late, as you’d be seeking protection against a known bad risk, but is increasingly the consequence of widespread media coverage of high profile businesses, in particular retailers, that have either become insolvent or are threatened by it.”
Trade credit claims: in numbers
Last year, the equivalent of 212 firms every week were helped by trade credit insurance
Claims costs ran at the equivalent of £4.3m every week
The collapse of Carillion alone saw an estimated £31m in claims costs
An estimated total of 17,243 companies entered insolvency in 2017, a rise of 4.2% on the year before
Last year, administrations fell by 6.2%, compulsory liquidations fell by 4.5% and company voluntary arrangements by 15.6%
The collapse of Palmer and Harvey and Monarch Airlines pushed claims received in Q4 2017 up to £130m
Insolvencies on the up
Last year, the collapse of grocery wholesaler Palmer and Harvey and Monarch Airlines contributed to the conversation, pushing the value of trade credit insurance claims received in Q4 up to £130m, its highest level since 2009. This year the trend has continued, with the high-profile collapse of construction firm Carillion, as well as toystore Toys R Us and electronics retailer Maplin.
According to the Insolvency Service, an estimated 17,243 companies entered insolvency in 2017, a rise of 4.2% on the year before, which the body puts down to an 8.2% rise in creditors’ voluntary liquidations.
In the same year, administrations fell by 6.2%, compulsory liquidations dropped by 4.5% and company voluntary arrangements by 15.6%.
Williams believes Brexit has been a factor in the rising number of insolvencies.
“It’s been a factor in a number of ways,” he said. “You’ve got a situation where labour costs have increased in a number of different markets. The costs of farming have gone up, as have the costs in construction.
“The movement of sterling against both the dollar and the euro have pushed raw material prices up, so margins are being squeezed. There’s a heightened concern over the health of the UK economy.”
Over three-quarters of policies last year covered domestic trade, with one-fifth covering businesses exporting goods and services overseas.
A Euler Hermes spokesman said: “2018 for retailers will be more than ever about getting up to speed with the latest technologies to stay relevant for the challenges of the future.
“Reinventing business models to avoid competing on price and finding the right balance between investing in new technologies and managing heavy debt burdens is a tough but necessary challenge.”
Williams believes that the high profile collapses themselves have helped to raise awareness and spur demand.
“We’ve had Palmer and Harvey, which was a very high profile trade credit insurance collapse in terms of the exposure,” he said. “It’s not necessarily as well known to the general public as Carillion and Toys R Us, but within the market that certainly spurs those that have not previously insured.
“People have come into the market that had self-insured previously. That is a trend that has continued to occur. We’ve seen more interest in the products as a result.”
The collapse of construction giant Carillion alone saw estimates of £31m in claims costs, according to the ABI. However, most creditors traded without cover.
Mark Shepherd, assistant director and head of property, commercial and specialist lines, said at the time: “The demise of Carillion is a powerful reminder of how trade credit insurance can be a lifeline for businesses in these uncertain trading times.
“One insolvency can risk a domino effect to hundreds of firms in the supply chain.”
Williams agreed: “In terms of Carillion, yes there was an element of underinsurance in the direct supply, but if you think about the people who have not been paid as a result of the collapse of Carillion all the way down the supply chain, that is an impact we haven’t fully seen yet.
“You’ll see that squeeze coming through in the market for a considerable period of time as companies find alternative sources of finance to bridge the gap.”
Fisher argues, however, that high-profile collapses have not yet translated into greater demand.
“High-profile collapses have not directly impacted the business demand for trade credit insurance,” he said. “However, the demise of large companies attracts significant media attention.
“They highlight just how quickly a company can transition from a strong risk to a poor one, Carillion, for example, destroyed its $1.7bn (£1.2bn) shareholder value in seven months. Unfortunately, this is not a trend that looks set to taper off, with many more companies in difficulty and many unknown factors that could trigger another collapse.
“Brexit adds another layer of uncertainty and, as we are not sure what leaving the European Union will mean from a trading perspective, business confidence has been negatively impacted.
“There is still much for the market to do in terms of educating companies on how best to protect their business in the face of the unforeseen.”
Last year, before the high-profile collapses took place, the ABI was already reporting a 40% rise in trade credit insurance claims since 2015.
However, Clyde & Co partner Andrew Grant said that the rise in claims is no cause for concern: “We knew this was coming and we’ve seen this cycle before.
“The trade credit market operates on a six to seven year cycle, which last got under way in 2009.
“We’re seeing a considerable volume of trade credit claims, but the market has stepped up to the plate before so there’s no need for concern. The UK is a world leader in trade credit insurance, supporting both domestic and world trade.”
Alun Sweeney, director for UK and Ireland at trade credit insurer Atradius, said at the time: “The last year has been defined by uncertainty, driven largely by the result of the Brexit referendum which has left a huge question mark over the future of EU trade relationships
“With continued uncertainty predicted, businesses are understanding the value of trade credit insurance more and more.”
With the market so tied to the ebb and flow of the economy, and with particular uncertainty still surrounding Brexit, there is not yet a clear picture as to whether the trends in trade credit insurance will continue.
A Euler Hermes spokesman said: “Overall we expect UK gross domestic product to grow by 1.5% in 2018. This economic resilience should pave the way for two interest rate hikes by the Bank of England, most probably in May and November respectively.
“This should progressively translate into higher interest expenditures for companies and households as 85% of bank lending to companies and 40% of households’ mortgages are at floating rates. Hence monitoring company payment behaviour remains key given the high stock of debt and lower corporate margins.
“Businesses continue to demand the reassurance that trade credit insurers provide, and our clients and brokers have always understood the risks involved in trading on open account and that we will continue to grant credit to their customers.”
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