Trade credit insurance claims hit record levels

Rise in claims reflects dire economy in first quarter

The total value of trade credit insurance claims rocketed by 166 per cent to a record £316m in the first quarter after companies were hit by a wave of insolvencies during the recession.

Claims made by UK companies for defaults on payments for domestic and international trade surged by 48 per cent to 9,213 in the first quarter, hitting the bottom line of leading credit insurers, the Association of British Insurers (ABI) revealed yesterday. It was the fifth consecutive quarter that claims have risen year on year.

Nick Starling, the ABI's director of general insurance and health, said: "The substantial increase in both the number of claims received by trade credit insurers and the cost of those claims shows that trade credit insurers are continuing to support businesses, especially small enterprises, through the recession."

The ABI data lays bare the scale of the problems facing UK companies during the first quarter, when the UK economy shrank by a jaw-dropping 2.4 per cent. Trade credit insurers protect suppliers against non-payment by companies which get into financial difficulty, and play a crucial role in oiling the wheels of trade in the economy. Mr Starling said: "Trade credit insurance claims are a good indicator of what is happening in the UK economy and how that is affecting UK businesses. Clearly, the economic situation remains very tough, trade credit insurers will continue to support their customers through detailed risk assessments and paying claims when things do go wrong."

Over the past year, credit insurers have been cited in the administration of retailers including Woolworths and Zavvi. Despite rising payouts for claims, credit insurers such as Euler Hermes, Coface and Atradius have been lambasted for scaling back cover for suppliers to vulnerable firms during the recession, particularly in the retail, leisure and construction sectors.

Perhaps surprisingly, given the scale of the current recession, the number of UK companies with trade credit insurance policies in 2008 remained fairly static at 14,086, compared with 1997 when 13,793 had policies. However, there was a dip to 10,413 and 9,811 having polcies in 2003 and 2004, respectively, when the economy was in better shape.

The scaling back of credit insurance can put substantial pressure on a company's cash flow because suppliers often demand a change in terms to continue delivering goods, such as payment up front or cash on delivery. Last month, the Government extended its £5bn trade credit insurance top-up scheme, which it introduced in April's Budget, after limited take-up.

Eligibility for the scheme will be backdated to include suppliers whose credit insurance cover has been reduced since 1 October, instead of being limited to between 1 April and 31 December 2009.