Credit insurers face huge rise in premiums

With more suppliers set to claim for bad debts, the cost of reinsuring risk could soar by over 10 per cent
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The Independent Online

Credit insurers face having to pay big increases in reinsurance premiums in the coming months as the effects of the credit crunch worsen.

Ahead of the so-called renewals season, brokers are predicting that the leading credit insurers, which seek to offload some risks to reinsurers via markets such as Lloyd's of London, will face premium hikes of more than 10 per cent.

One Lloyd's broker said: "I guess it's not really a surprise that they will have to pay up in this environment, but the kind of rises being mooted are much higher than we'd imagined. I think there'll be a lot of people in the wider economy who think they are getting their just desserts, given that they have pulled coverage on so many companies recently."

Credit insurers cover businesses against the risk of bad debt due to insolvency or protracted default of their buyers. With the number of claims being made by suppliers increasing, underlying reinsurers are reappraising the rates they charge to buy risk.

Leading players in the credit insurance market – including Euler Hermes, Atradius and Coface – which together control more than 80 per cent of the market globally, have hit the headlines recently for withdrawing cover for suppliers to household names including Woolworths, JJB Sports, DSG, the owner of Dixons and PC World, and retailers owned or part-owned by Baugur, the troubled Icelandic investment firm.

The decision by Atradius to pare back cover to suppliers of DSG last week sent its shares into a tailspin, losing more than 30 per cent of their market value in one trading day. The trio also pulled cover last week on suppliers to ailing US giants General Motors and Ford Motor, which are lobbying Congress for bailout funds amid an unprecedented slump in car sales.

One leading restructuring expert said the credit insurers were overreacting: "The knee-jerk reactions of the insurers shows a lack of intelligence and understanding of companies in many instances.

"I'm simply not sure they have the right tools to make a proper assessment, so they just pull cover to be on the safe side in many instances."

A senior manager at one leading credit insurer dismissed the criticism: "The press loves to get hold of stories about cover being pulled, but there are lots of companies that have benefited from credit insurance, which will become more important in this difficult environment. If a train is coming straight at you, you don't just wait for it to hit. You do something about it."

Euler Hermes recently made the gloomy prediction that business failures in Britain would rocket by more than 50 per cent in the coming year, while Atradius warned that the construction industry was likely to see a wave of failures in 2009. It is believed that around a quarter of all the UK's credit insurance policies are written for suppliers in the construction arena.