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Viewpoint Autumn
- Market news
- Are premium increases on the horizon?
- Insurance and risk
- What options are left for companies caught in the credit crisis?
- Pleural plaques – a ticking time bomb for UK business?
- Is your business vulnerable to the virus?
- Sink or swim – would your business stay afloat after a flood?
- Environmental Liability - the polluter pays
- Insurance Clinic
- Insurance Clinic
What options are left for companies caught in the credit crisis?
Over the last year the economic turmoil in the wider business community has been amplified in the credit insurance market. In October 2008 capacity all but disappeared, consumer and corporate spending came to an abrupt halt and claims costs began to escalate, rising by a staggering 166% over a 12 month period. In response to the turbulent economic environment, insurers drastically altered their underwriting approach to credit insurance, withdrawing cover on an unprecedented scale.
The cull on cover affected some sectors more than others; the automotive, retail, construction, metals, manufacturing, engineering and haulage industries being hit particularly badly. Even financially sound and profitable businesses were left vulnerable and without cover simply because they were in, or sold their products to, the wrong sector.
Twelve months later companies are continuing to feel the impact. Many businesses are finding it difficult to obtain commercially acceptable terms and there has been a substantial rise in the number of organisations trading unprotected and uninsured. Companies, affected by their own credit risk, are being forced to find additional working capital to pay suppliers upfront, at a time when resources are already stretched to capacity. While many suppliers have enjoyed years of profitable trading with their customers, they are not prepared to continue to trade on uninsured credit in this economic climate.
Acknowledging the depth of the crisis, the Government launched a top-up scheme designed to help those affected. The initiative has been heavily criticised for only offering a top-up if the insurer has reduced cover rather than withdrawn it altogether. In over 90% of cases, the scheme doesn’t apply and its critics cite the low take-up as evidence of its ineffectiveness. Less than three months from the closing date and only 80 policies worth £13 million, out of the budgeted £5 billion reserved, have been taken up.
Sally Del Principe, Associate Director - Credit, commented,
“Considering the amount of time, expense and research that has gone into this scheme it is disappointing that it hasn’t worked. Businesses are continuing to struggle because they are not receiving the support they need from their banks and insurers. Unfortunately, the Government only saw fit to consult with credit insurers, had they also sought opinion from the broking community they would have received an entirely different point of view reflecting the needs of UK industry.”
In addition to loss of cover, companies that once relied on the disciplines and procedures outlined in their credit insurance policy, have also lost their guiding principles for credit risk management.
As a consequence, many businesses have been left with no choice but to put aside a reserve to cover the risk. A self-insurance programme can be a lifeline; a robust, professionally-arranged scheme can be cost-effective and, depending on the structure, tax efficient. If bad debts are reduced, payments into the programme can be profitable, rather than a cost as a credit insurance premium would be.
A well-planned, realistic self-insurance scheme would be based on up-to-date trading experience and monitored daily against real-time data. It would include bad debt provision, calculated daily using risk profile rather than the traditional percentage of bad debt buckets.
Sally concludes,
“Businesses are adapting and finding solutions to the credit insurance crisis and a self-insurance programme can be a practical alternative for those struggling to find cover. When under-pinned by expert advice, a self-insurance programme can deliver improved financial security, discipline and credit control.”
Contact us
For more information, please speak to your usual Perkins Slade contact or call Sally Del Principe on 0121 698 8029 or email us at credit@perkins-slade.com
PS self-insurance programmes
Our self-insurance programme delivers all the features outlined in the above article with the added benefits of:
• daily or weekly cashflow
• a highly sophisticated forecast that can be calculated on any ledger and takes into account customer DBT and previous invoice dilution
• analysis of the cost of funding credit sales and delinquent payers. In addition, a list of the top delinquent payers, and the cost they represent to the business through their payment patterns, is provided
• automated reporting of accounts that have breached predefined criteria
• catastrophe cover can be obtained to cover the larger exposures.
PS supplier credit
Companies in struggling trade sectors are also finding it difficult to obtain credit terms from suppliers. Our credit team can help change insurers’ perceptions, providing expert advice on changes you can make to highlight positives and reposition the risk.
