Rising cost of insurance hits firms

Business suffers another blow as credit insurers make greater demands for new contracts

Small businesses are being hit by a steep rise in the cost of credit insurance taken out to cover bad debts. Many are finding they are unable to get cover at all.

Credit insurers have confirmed they are increasing premiums by up to 40% for clients who are renewing their contracts, and in some cases by much more. They are also refusing to provide cover for some operating in high-risk sectors such as retailing and construction and are turning away large numbers of new customers.

Credit insurance covers small firms for bad debts suffered if one of their business customers is unable to pay, usually because it has become insolvent. Without it, firms themselves are forced to take on the risk of customers not paying. If the amount owed is large and not paid, the business could be forced to close.

Shaun Purrington, regional director at Atradius, one of the biggest credit insurers in Britain, said: “It is fair to say that compared with six months or one year ago small businesses will find it more difficult to get credit insurance. I’m afraid that the appetite of credit insurers to write new policies has declined.

“Companies that come to us and ask for cover on firms [they wish to trade with] that are clearly in financial difficulties, or that are operating in very difficult sectors, will find it nearly impossible to get cover.”

He warned that in addition to rising premiums, typically 30% to 40% up on last year, small businesses renewing their premiums would be asked to take on a greater share of the risk.

“Historically they would have typically taken 10% of the risk whereas now it will rise to 15% or even 20% in some sectors,” he said.

Small-business organisations are outraged over the plight of small firms. Phil Orford, chief executive of the Forum of Private Business, said: “Taking premiums in the good times but pulling cover when conditions worsen is a scandalous affair.

“Credit-insurance companies should be able to manage risk over a defined period, accepting losses as well as sur-pluses. That’s how the insurance industry works across the board. Perhaps this is another financial area requiring tighter regulation in the light of such catastrophic actions.”

He added: “Many businesses of all sizes are finding it is impossible to get any cover at all. The actions of credit insurers make it increasingly difficult for our members to do business with other companies and to protect themselves against increasing instances of late and defaulted payments.”

In a recent survey of its members, the Forum of Private Business found that one in five were experiencing serious difficulties with their credit insurance.

Stephen Alambritis at the Federation of Small Businesses said: “It really is appalling that the industry is pulling back from providing reasonable insurance at reasonable rates. We are very angry at the way in which credit insurance is either nonexistent or very expensive.

“It is a sad state of affairs when an industry that was very bullish and was wanting to sell its policies left, right and centre when times were good now just doesn’t want to know.

“Without credit insurance, a lot of small businesses simply can’t trade. The fault lies with the insurance industry for pulling back so quickly. One day they were there, the next day they were gone.”

At present about one in five businesses in Britain has credit insurance, which typically costs about 0.3% of sales in terms of premiums.

Fabrice Desnos, chief executive of Euler Hermes UK, another big credit insurer, said that in the past five months his firm had seen a large increase in the number of small firms seeking to take out credit insurance for the first time .

“A lot of businesses that didn’t care about it a year ago suddenly think it is a good idea. When we receive such an increase in demand we are rightly being very selective about the types of clients that we think we can accommodate and the type of clients who will buy into our ethos of risk management as well.

“We are not there to swap debts and suddenly be there to pick them up at the worst possible economic time. Sometimes there is some demand that cannot necessarily be catered for because some of the risks are uninsurable.”

Desnos said that the rise in premiums depended on the individual client. The price is determined by their record of claims and the sector in which they are operating.

“Obviously, the construction and property sectors are very difficult, and everything that is linked to the automotive sector is difficult,” he said.

“The experience that we have in terms of claims with a particular client will have a great bearing on the repricing that we will try to enforce.” Desnos pointed out that there had been a substantial increase in the number of claims being made by small businesses, particularly in the second and last quarters of 2008.

The government last week confirmed that it was looking into the possibility of providing some kind of assistance to help more small businesses get access to credit insurance.

The Department for Business, Enterprise & Regulatory Reform said: “We understand the problem faced by companies that rely on credit insurance. It’s important that any intervention allows businesses breathing space to reach new arrangements with lenders and suppliers - while also protecting taxpayers. We are looking carefully at these issues.”

It is understood that one option would be for the government to underwrite 50% of credit-insurance risk in situations where cover would otherwise be withdrawn. An announcement is thought likely in the next couple of weeks.

Daniel Steel, managing director of Esdevium Games, a specialist games distributor based in Hampshire, said that government intervention would be welcomed by small firms such as his.

“Some form of sharing some of the risk would probably have a very beneficial effect. Credit insurance is the oil that keeps the engine running in business,” he said.

“If you don’t have credit insurance, business seizes up. If we didn’t have credit insurance it wouldn’t stop us trading but it would have a significant impact on what we could do. A little intervention could make quite a big difference to a lot of people.”

Steel said that his credit insurer was steadily reducing the limits on the amount of trade that would be covered by the insurance he had, making it difficult to do business with some long-standing customers.

“The problem is that they are having to be cautious and that affects our ability to trade with our customers,” said Steel. “So you get into a downward spiral.”

WHAT IS CREDIT INSURANCE?

FIRMS take out credit insurance to protect themselves against trade customers failing to pay bills. It is particularly important in industries such as construction and retailing, where payment may not be due for up to six months. If a customer goes bust, the credit insurer will pay out an agreed percentage of the money owing.

Before a business starts trading with another firm, the credit insurer will agree a trading limit for that specific company. The insurer may then adjust this limit to reflect changes in trading conditions.