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Credit insurance at a glance: challenges and solutions

Author: Gerry Donnelly
22 October 2010

(As featured in Midlands Business Insider - 1 December 2010)

Are rising premiums causing businesses as many problems as lack of bank funding?

In the current economic climate, any increase in costs could cause issues to businesses, especially those within the small to medium sized enterprise (SME) sector. Funding is, however, a greater problem for many businesses.

Though premium rises seem to have tailed off and competition is once again starting to hot up in the market, the level of cover being written by credit insurance companies significantly diminished in the last couple of years and still remains far below the peak. It is this absence of cover which tends to be cited by business owners as a fundamental risk to their longevity, rather than the increasing premiums.

Both traditional bank lenders and Asset Based Lenders are now, more than ever, basing funding decisions on the credit limits available on the customers of their clients. Therefore, as insurers have become more and more risk averse in their approach to limits, so funding levels have fallen dramatically.

In many cases, the lack of a suitable credit limit is indicative of a poorly performing business, and should lead to questions as to the commercial rationale for continuing to trade with a poorly rated customer. It is, however, important to point out that cover can also be denied on companies for reasons not necessarily aligned with under-performance or risk of business failure. These reasons can include:

• Late filing of accounts
• Change of company name or ownership
• A general lack of appetite for a particular sector

What sectors are presenting problems for the credit insurers?

The main sectors currently presenting problems for credit insurers are those that have been hardest hit by the recession, namely:

• Automotive
• Construction
• High Street Retail

Why are premiums rising?

At a macro level, rising premiums reflected the credit insurance industry’s re-alignment of strategy to combat the economic downturn. As competition within the industry became more intense, business development teams were forced to offer policies at very tight margins, which were often out of kilter with the level of cover being provided. Such “price based” offers were not sustainable in the long term, especially as the providers were being subjected to increasing levels of claims.

The rise in premiums and, to an extent, the fall in cover provided, is the industry’s response to a strategy which was simply not sustainable in the long term.

What can businesses do to help?

Credit limits are based fundamentally on the provision of information, both financial and general. The more information that is provided or available, the easier it is for the insurer to come up with a realistic credit limit. While clearly an over-simplification, if there is no information on which to base a decision, the resulting limit will be zero.

As well as reviewing Companies House information, the providers’ risk teams will also review press articles and payment trends. The main thing a business can do to help is to ensure the provider has as much information about their customers, and their historic payment profile, as possible.

For further information, please contact Gerry Donnelly using the online form below.