After being accused of exacerbating the problems of struggling companies in the depths of the recession, the $6.5bn-a-year trade credit insurance industry has reformed the way it operates.
Industry executives say insurers, which cover the risk to companies of clients running into such serious financial difficulties that they will be unable to pay their bills, have been demanding greater disclosure from debtors.
During the boom years, says Tim Smith, trade credit practice leader at Marsh, a leading insurance broker and risk adviser, cover had been “provided on fairly limited information – at least on lower level credit limits. It sounds rather ridiculous now.”
Since then, he says, insurers have been increasingly entering into non-disclosure agreements with companies to provide specific – and often highly sensitive – financial details that provide greater insight than historic information from regulatory filings or sector-wide analysis.
The additional financial information should allow insurers to manage their exposures more intelligently and spot potential problems in advance. This should help them avoid the hasty decisions for which the industry was chided during the height of the recession, say brokers.
Conscious of the problems that could arise if they refuse, companies tend to be obliging in providing further details, say risk managers.
Many businesses can trade without such insurance, but companies operating in some sectors – retail, for example – regard it as a crucial backstop.
Without the insurance, suppliers can begin to demand payment sooner than usual or even in advance, leading to cash flow problems. Some companies faced such difficulties in 2008 and 2009, after cover was quickly cut or withdrawn in the face of greater than expected losses.
Bill Grimsey, then chief executive of the Focus DIY chain of UK home improvement stores, called the insurers “fair weather friends” who “make unilateral decisions at short notice and jeopardise the futures of businesses”. The company went on to call in administrators.
Richard Talboys, trade credit leader at Willis, another large broker, says the insurers had “got a bit casual with their risk assessment at the bottom end …We’d had five or six years of silliness”.
He adds: “When the crisis hit, they had a lot of companies for which they couldn’t get quick information and they had to cut very quickly. There was just insufficient data. They’ve learnt that lesson. They’ve built their databases up significantly. Their risk assessment is much better.”
Euler Hermes, one of the world’s three largest trade credit insurers along with Coface and Atradius, says the provision of confidential financial information “enables us to base our underwriting decisions on the most up-to-date position”.
Of the UK retail sector, it adds that without such information “we will veer on the side of caution in our decision-making. In the current retail trading environment, it would be reckless not to.”
Clem Booth, board member of Allianz, the German insurer that owns Euler Hermes, says: “With the benefit of hindsight, it turned out that trade credit insurers were overly cautious in 2008 and 2009 but we were in uncharted financial waters.
“What we did afterwards was spend a lot of time rehabilitating relationships to such an extent that we now have a 90 per cent plus customer retention rate.”
However, the insurers are still bracing themselves for a rise in insolvencies in several markets. The International Credit Insurance & Surety Association, which represents insurers that cover more than $2tn in receivables, says the industry is worried about the outlook in Europe, the US and Japan, given the sovereign debt crisis and a lack of bank financing.
Euler Hermes provided a further insight into the thinking of the sector in a recent report on the global economic outlook. It highlighted the food, pharmaceuticals, automobile manufacturers and chemicals sector as “holding firm”, but raised concerns about retail, air transport and construction companies in Europe.
In its UK risk bulletin for 2012, the group said it had begun the year with a sense of “nervousness”, as it expected levels of insolvencies to “remain at historic highs”. It added: “It is clear that it is not just smaller entities failing. Insolvencies are not increasing in volume but are definitely increasing in size.”
Brokers say that, overall, the cost of such insurance is expected to rise this year after several months of declines when competition among underwriters put pressure on rates. Marsh says trade credit insurance premiums in Europe, the Middle East and Africa fell by between 5 and 15 per cent year-on-year in the fourth quarter of 2010.
By the same quarter of last year, that had slowed, to between a 5 per cent decrease and a flat outcome.
“The outlook has got to be upwards,” says Mr Talboys at Willis of premium rates this year. “You look at the euro crisis, the Greek issue, the downturn in public spending – you do question many product lines and the fear is from the insurers that there will be some big ones [failures] on the horizon.”
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