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Lack of insurance hampers trade
22 November 2009 By Samantha McCaughren, Business Correspondent
Billions of euro in Irish trade is covered by credit insurance, but over the past year, significant levels of this cover have been withdrawn, causing problems for thousands of businesses.
Retailers in particular are finding that insurers are declining to cover orders with suppliers, with many of Ireland’s leading stores under pressure to pay cash upfront.
Trade credit insurance has been the mechanism that allows many suppliers to offer credit to trading partners and, until last year, was something few businesses thought much about. If a fashion group had a €1 million order with a clothing company, it would get credit and the supplier would have been insured, reducing any risk.
But in the past 12 months, bad debts have escalated dramatically. One leading credit insurance company, Atradius, said that claims had jumped from €2-3 million a month to €20 million a month. Claims paid out by trade credit insurers now well outstrip premiums collected. In some cases, claim payments are as much as double premium income. This jump in claims left insurers reeling and led to a dramatic reduction in cover in the Irish market.
The first sector that saw a clampdown in insurance was construction, but now the spotlight is on retail and, to a lesser extent, hospitality. Several sources told The Sunday Business Post that some of Ireland’s biggest name retailers are now without cover, or have very little cover, which means that suppliers are seeking cash up-front or declining to do business with them. Retailers affected include supermarkets, department stores, fashion and sportswear chains and electrical goods companies.
The lack of credit insurance basically reduces credit available to these companies and puts increased pressure on cash flow. The three main credit insurance firms are Atradius, Euler Hermes and Coface, and all three now require greater financial data from businesses when deciding whether to cover suppliers.
One company, Coface, has reduced Ireland’s rating from A1 to A3, which means that companies doing business with Irish firms pay higher premiums.
Peter Boucher, managing director with trade credit insurance broker Cimco, said thousands of companies had seen cover withdrawn and reduced.
He said the reduction of trade credit insurance was one of the biggest problems thrown up by the recession, but one of the least talked about.
Boucher said insurers reacted swiftly to the rise in claims seen last year, caused by Irish business failing to pay for goods. ‘‘A lot of times, they just reduced limits, with no scientific approach. Certainly they did that in the early part of this year, in a way that was seen to be fairly arbitrary," he said.
Boucher said many Irish firms were unaware that credit insurance even existed until recently.
‘‘The first time a lot of these firms found they were on these databases was when their limits were being reduced.
They suddenly found that suppliers who were happy to supply them on a credit basis were not able to do so any more," he said. ‘‘There has been a reduction of billions of euro in working capital as a result of credit limits."
But he said the main insurers were not the only option for Irish companies, and that other players based in England were willing to provide cover for Irish businesses.
David Fitzsimons of Retail Excellence Ireland said the reduction of credit insurance had been a problem for members.
‘‘Bit by bit, credit insurance has been removed from the Irish market," he said. ‘‘Basically, the Irish retail industry is uninsurable, according to many."
Naturally, it has been difficult for suppliers to tell customers that they can no longer extend credit to them. ‘‘There is a bit of friction, obviously, because you have a long-standing relationship with the supplier and it is personally upsetting if they’re implying you’re no longer ‘good for it’. That is a difficult conversation being had in the market," said Fitzsimons.
A retail source with a well known Irish company, which has seen its cover reduced, said the worst-affected sectors were those that depended on discretionary spending. They included fashion, furniture and electrical goods shops. He said these types of companies were being looked at hard by the credit insurers. He also said it was a problem for all Irish businesses, as the insurers had suffered such heavy losses in the past year.
Stuart Ramsden, Ireland country manager for Atradius, said measures were being introduced to open up the market.
Atradius covers around 60 per cent of the Irish trade credit insurance market, with the majority of its business relating to domestic insurance. It was exposed to the construction sector, so took a heavier hit than some competitors. Atradius and other credit insurance firms have increased the level of information that they require from clients’ customers.
Industry sources say co-operation has been mixed.
Companies that are unlimited or companies that file abridged accounts are among those required to give insurers more information.
‘‘Our main goal is to try to stay open for risk. If somebody has a very stable set of statutory accounts that look as if there is a huge weight behind them, there’s no need for us to go looking for more finite information. Obviously, the weaker a company becomes in terms of its financial position, [the more] we try and engage with them and get more up-to-date information."
‘‘It is fair to say that we have reduced our cover, but we do expect that, by 2010,we’ll come back on for more cover," said Ramsden. He said the level of cover in financial terms had reduced by 30-35 per cent. Some of the fall is because orders are about 5-10 per cent lower than they would have been in the boom years.
Ramsden also said that through 2009, Atradius was paying out around double the premium it was taking in. At the same time, premiums had gone up around 25 to 30 percent. ‘‘We saw the levels of claims move to unprecedented highs.
Then it was about identifying the problems which are occurring, what type of companies are defaulting, where are the risks - and now we feel we understand the patterns," he added. Atradius has now established a new ratings system for companies which is available to all clients; this will help transparency.
Dean O’Brien, of another major insurer, Euler Hermes, said particular sectors were not being targeted for lower risk. ‘‘When we look at sectors, that’s really only part of the equation or sum of information we collect and analyse.
What we do from a risk perspective is look at individual buyers for our customers and make an assessment. ‘‘The most important thing is how that individual company is performing and the economic background," he said.
Another large player is Coface, which monitors around 6,000 Irish companies daily.
Xavier Denecker, Coface managing director for Britain and Ireland, said: ‘‘I would say credit insurance has been severely hit. We are still losing money in general, and specifically in Ireland.
‘‘We have always said that, if we need to cut cover, we will cut cover on companies that are fragile - the weakest financially. It is true that we have reduced our exposure in Ireland," he said.
Coface risk manager for Ireland Tony Gordon said the first sector affected was construction:
‘‘But certainly retail is on the agenda at the moment, as consumer confidence and consumer spending has fallen by more than 10 per cent across the board. In specific retail sectors, it has fallen between 25 and 40 per cent.
‘‘We have had to focus on that and look at the more vulnerable or weaker companies in those sectors and review those aggressively," he said. In certain circumstances, companies are going to Coface on a quarterly or half-yearly basis and providing them with additional management information which allows the company to re-assess the risk.
Celine Caulfield, commercial director with Trade Credit Brokers, said the last few months had been difficult, but that the market for credit insurance was re-emerging: ‘‘They are re-opening their books and have recently gone on road shows, They are saying they are easing back and seem to have gone through the worst period. There are still claims in the system, but the volume of new claims has dramatically reduced."
‘‘On foot of that, they’ve made a decision to re-open their books," she added. ‘‘It’s a cautious step, it’s not open arms."
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