Credit insurance premiums for UK companies are likely to increase substantially in 2018.
For more than two decades the credit insurance market has seen a substantial drop in premiums, with the market insuring £314bn of turnover in 2016 against just £101bn of turnover in 1995, trebling the risk taken on.* By contrast, in that period premiums have risen by only 45 per cent. So for every £1 spent on premiums in 1995, it now costs less than 48 pence to cover the same risk.
Since the early 1990s insolvencies have been quite benign in the UK. They ticked up over the financial crisis in 2008 but were not to the levels expected due to interest rates falling to record lows and banks being bailed out by government money. This has meant that premiums have continued to decline against a background of underwriters taking on greater risks.
The environment for cheap credit insurance premiums seems about to end. From 2015 to 2016 claims rose by 12.6 per cent, with the average policyholder making at least one claim on their policy.* This was prior to the first bank interest rise we saw in 2017 and the start of further increases. Zombie companies which were able to service debt at low levels of interest are now likely to fail at a time when banks have largely been unleashed from their obligations to the government to back off on winding-up orders. Recent figures show insolvencies have increased in 2017 and may approach the record insolvency figures last seen in 1993.*
The straw that likely broken the camel's back is the failure of Palmer and Harvey in the past few months. It has been reported that insurable claims totalled £100m.* On its own this debt represents about 30 per cent of the annual premiums earned by UK underwriters. If this number were added to the £210m of claims paid out in 2016, it would mean that about 80 per cent of all premiums are now being paid out in claims and, given the insolvency figures in 2017, this is likely to be a very conservative estimate.
Palmer and Harvey is not simply a one-off. As typical with any insolvency storm, the retail and construction sectors are displaying signs of immense pressure. In construction the problems of Carillion are well publicised and its failure would cause a massive domino effect among sub-contractors [editor's note: this article was written on the eve of Carillion's collapse]. Equally, in retail large enterprises such as Poundland and Toys R Us are in the headlines for their financial difficulties, with many others on the critical list.
The credit insurance market is hitting a perfect storm of interest rate rises, exchange rate fluctuations, an economic slowdown and Brexit plus a holding back of the natural market adjustments due to the 2008 financial crisis.
In addition to likely premium increases it is probable that market capacity on companies, particularly in retail and construction, is likely to be limited and those seeking to buy cover too late will find they cannot get credit limits on their major customers.
My advice for those who have credit insurance is to buy two- or three-year deals if they are available. For those who do not have a policy, the window for getting insurance at an economic price with the cover on the customers you require is closing fast.
Mike Stott is an export and domestic credit insurance expert at Rycroft Associates
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