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June 24, 2022

Case for credit insurance further strengthened as insolvencies surge

With company insolvencies on the rise, could trade credit insurance protect your business against late or unpaid debt?

Stephen Hodgson trade credit insurance

As long ago as April last year I warned of the likelihood that insolvencies would increase once the UK government's Covid protections were removed, writes Stephen Hodgson.

Sadly, the latest figures from the Insolvency Service are proving me and other commentators right.

It's perhaps unsurprising that registered company insolvencies this May soared by 79% year-on-year.

After all, in May 2021 those pandemic protections still had a few months to run.

More startling - and worrying - is that the figure is now 34% higher than it was three years ago, pre-pandemic.

Counting the costs

Whilst compulsory liquidations are down on pre-Covid levels, Creditors Voluntary Liquidations (CVLs) are up by a staggering 66%.

Of course it's not just the ending of government support - which ceased last September - that is at play here.

Costs are rising fast for very many businesses.

For example, in the construction sector, the price of building materials has risen some 27% against pre-Covid levels.

Labour costs are also rising as the nation battles the cost-of-living crisis, with hard-pressed workers being hit by inflation which is now running at 9%.

Beware the domino effect

As I cautioned last year, the impact of insolvencies ripples out across the economy.

A domino effect on supply chains means that companies that are themselves in rude financial health, can nonetheless be stricken by the failure of a customer.

The collapse of online fashion retailer Missguided highlights appears a case in point.

Its fall into administration came after the police were reportedly called after angry suppliers - allegedly owed millions - turned up outside the company's Manchester headquarters to demand payment.

The Guardian reported that "angry suppliers" have filed an official complaint to the Insolvency Service.

Moreover, said the newspaper, they are threatening to push over another domino, by considering legal action against the company's private equity owners over what they consider to have been its “reckless approach”.

Taking Credit Insurance

Thankfully, there is a way that businesses can protect their pounds, shillings and pence.

Trade credit insurance can help keep a healthy business's balance sheet in the black.

It does so by safeguarding cashflow, protecting against late or non-payment of invoices for both products and services.

In 2019 members of the Association of British Insurers (ABI) protected nearly £367 billion of turnover through trade credit insurance policies.

As I pointed out back in April 2021, the ABI had previously reported that trade credit insurance had helped UK businesses mitigate against the impact of record-breaking bad debt.

In January 2020 it noted that the average value of claims had soared by 200%, reaching an historic high of £67,500.

It's not hard to imagine that both the volume and value of credit insurance claims will further rise as the UK navigates exceptional stormy economic weather.

Securing value

Currently there is good risk appetite among insurers for provision of trade credit insurance. Premiums remain competitive.

But, if insolvencies continue to and underwriters become exposed to greater financial risk, it would be no surprise if the market has hardened, as it has for many business insurance lines.

That would mean capacity being reduced, underwriting restrictions tightened and premiums increased.

There is potentially no better time to consider this essential cover.

A suitably experienced and expert commercial insurance broker, can assist in navigating the multitude of insurers and policies on the market.

Professional assistance in presenting a business risk to underwriters is also key. A good broker will be able to advise on the facts and figures, policies and procedures that tick the right boxes.

Invaluable insights

Of course you need look no further than RBIG. We have pedigree.

That means you can benefit from the trust and respect we have forged over more than 40 years with key credit insurance underwriters.

Working for you and in partnership with them, we can provide invaluable insights into the specific credit risks you face .

Our service includes rigorous assessment of your business and its sales ledger operations. From this we can provide you with a confidential report which details the credit risk presented by your customer base.

This in turn informs the level of cover you require. Your bespoke report can then be presented - along with other key information - to the trade credit insurers which sit on our specialist panel.

With every economic indicator pointing to further tough times lying ahead, trade credit insurance is really no luxury. It's a potential lifebelt for financial healthy businesses which, through little or no fault of their own, could be thrown into stormy waters.

If you'd like to discuss trade credit insurance in relation to your business's specific circumstances, please contact our Credit Risk Manager Dave Sterlini.

He can be contacted by calling 0161 304 5056 or via email.

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