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Trade credit insurers tighten UK appetite

Trade credit insurers in the UK are paring back the level of cover they offer to clients, amid a deteriorating claims environment.

The pressure is being led by the three largest trade credit insurers in the market: Euler Hermes, Coface and Atradius.

Trade credit insurers cover the risk of a company’s suppliers going bust, leaving them with unpaid invoices.

Shaun Purrington, managing director of credit and surety broker Avenue Insurance Partners, said: “There’s definitely a tightening going on. It’s not even rates going up, it’s insurers walking away from certain policies.”

Purrington said there had been a “shock” in the market because of the level of claims. He added that many insurers have multi-year exposure – policies that will now not be renewing on the same terms.

The key renewal dates in the whole-turnover trade credit market are 1 January and 1 April.

Market sources polled by The Insurance Insider agreed that prices were increasing marginally, with coverage being cancelled in a move led by the big three insurers.

One underwriting source said more than half of buyers would see modest rate increases of around 2 percent at renewal.

However, an abundance of capacity in the market is stopping prices rising further.  

“It’s difficult to increase prices if there is a lot of competition,” said another source. “We are a very long way from a hard market.”

Claims

The Association of British Insurers reported that Q2 2018 was the most severe period on record for trade credit claims in the UK, with £92mn ($80.7mn) paid out. The previous high was set in the third quarter of 2009.

Sources said the last time there was this level of risk aversion in the UK market was a decade ago, during the financial crisis.

It has been suggested that one credit insurer has cut around 2 percent of its book by cancelling policies, with the cancellations focused on troubled areas such as retail, food and construction.

Suppliers to department store Debenhams are no longer able to get cover against the risk of the firm going out of business. Coverage to House of Fraser was withdrawn in February.

Underwriters are keen to correct the impression that insurers ditch clients as soon as the going gets tough, and point out that they stay on risk for up to 18 months, depending on the type of policy in place. Utility companies, for example, buy cover for a year ahead, locking an insurer in regardless of whether they would continue writing new business. 

A spokesperson for Atradius said: “Non-payment is the single biggest risk to a business and, unfortunately, one which shows no sign of abating.”

The spokesperson added: “Atradius economists predict insolvencies will rise by 6 percent in 2018 with failures concentrated in the construction, retail and hospitality sectors.

“It is widely recognised that the retail sector has faced challenges for an extended period of time and that the current economic environment is exacerbating those pressures.”

Atradius said its risk appetite remained high and risk exposures in the UK have continued to grow “despite the uncertain and volatile economic environment”.

A more circumspect approach to UK trade credit underwriting by the big three carriers is also creating opportunities for rivals. Carriers like AIG, QBE, Canopius and Axa XL are ready to step in on placements dropped by Euler Hermes, Coface and Atradius.

Other UK trade credit insurers often write cover on an excess of loss (XoL) basis, with the client retaining more risk, relying on credit insurance only for the most costly claims.

“XoL works well for large companies, the onus is on the client,” said a big three source. However, they added that this approach was not suitable for medium-sized businesses with less sophisticated credit management resources.

Brexit

Brexit is lurking in the background for carriers. Euler Hermes puts the risk of a hard Brexit at 25 percent.

It is feared a hard Brexit would cause a severe drop in the value of sterling. The Allianz-owned carrier puts the chances of the UK remaining in the EU at 5 percent.

The International Monetary Fund (IMF) has also warned the UK faces a recession in the event of a no-deal Brexit. GDP growth is likely to be 0.25 percent lower as a result of Brexit, the IMF said.

Unlike most insurance, which is largely unrelated to the wider economy, the performance of trade credit carriers is intimately tied to the health of the economy.

Credit insurers are particularly concerned about sectors like car manufacturing, which requires parts to cross borders with precise timing.

As credit insurers typically think at least six months ahead, they are already preparing for a Brexit that is likely to bring more claims, cover cancellations and higher rates.

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