As the man in charge of Euler Hermes UK, one of the country’s biggest credit insurers, Fabrice Desnos is perfectly placed to give an early warning for the future of British trade during the downturn. And the view he offers from his 36th floor office is not bright.
“The problem …is this is a perfect storm,” he says. “Everything has gone wrong at the same time.”
Euler Hermes has risk assessors evaluating solvency risks in thousands of businesses across all sectors in the UK.
When suppliers hand over goods to other companies, it often takes up to 90 days for them to receive payment. To mitigate the risk of the buyer not being able to pay at the end of that period, the supplier can take out insurance that will cover about 90 per cent of that risk.
This market is dominated by three big players, Euler Hermes, Atradius and Coface, and each of them lives or dies by its accurate assessment of the risk of buyers going under.
So when Mr Desnos describes the current outlook as the worst he has seen in his working life, it is worth paying attention.
“For a precedent we have to look back even before the early 90s,” he says.
There is a chance he is being overly pessimistic. Companies often complain bitterly if insurers stop covering their suppliers, and sometimes claim that action causes companies to collapse. The failures of ScS Upholstery and the Fopp music chain were both hastened, if not created, by credit insurers refusing to provide cover for suppliers. Mr Desnos is defensive about such claims. “We are not here to bring companies down,” he says. “We will only cancel cover on a particular company as a last resort, if it is very serious.”
But credit insurers can find themselves cast as villains as companies publicly blame them for withdrawing cover too quickly.
“The buyers can be using the press to bully us into doing things we don’t feel our clients should be doing, says Mr Desnos. “We should be the first to be concerned because we are unsecured. Banks are fully secured creditors if a company goes under, but we do not have that protection.”
And they have reason to be concerned. Euler Hermes recently released its results for the third quarter and they did not make for happy reading. While premium revenues rose 6 per cent to €444m (£362m), the amount paid in claims rose more steeply, leaving the company with only €23m after payouts.
The other two big insurers are also suffering. Tim Smith, head of trade credit at insurance brokers Marsh, says while insurers have enjoyed loss ratios of 40-50 per cent in the last few years, that has risen to an average of 60 per cent and is due to rise again next year. Euler Hermes suffered a loss ratio for the third quarter of just over 70 per cent.
But insurers continue to write policies. Mr Smith estimates a 15-20 per cent rise across the board in premiums written as suppliers get jumpy about companies they were previously willing to trade with on credit.
This leaves insurers facing a delicate balancing act. On the one hand, their business is to write premiums, and they all want to use the current financial problems to increase revenues. On the other hand, nobody knows where the next major collapse is coming from and, if the insurers fail to anticipate it, it could have a disastrous effect on their own businesses.
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