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Viewpoint: The importance of trade credit insurance
Archived article dated Tuesday May 12th 2009
Although it has long been a crucial link in the retail sector's supply chain, trade credit insurance was, until recently, a part of the industry which quietly went about its business relatively unseen.
By Helen Dickinson, Head of Retail, KPMG
In times when the trading environment was more upbeat, suppliers took out trade credit insurance - with premiums based on the reliability of their customers' payments - to protect their debt. The arrangement ensured that if something went wrong, such as a retailer getting into financial difficulty, they would still be paid.But as the economic climate started to worsen, with retail insolvencies having a negative effect upon the supply chain, the credit insurance industry became more high profile. The Association of British Insurers (ABI) recently stated that credit insurance claims were 51% up on the previous year.
The financial viability of suppliers has always been a key risk in the retail supply chain. But, on top of the greater challenges they are dealing with due to the difficult trading environment, many are now dealing with the scenario of credit insurance having been reduced or withdrawn. This could mean that significantly faster payment is required to continue supply, or retailers face dealing with the loss of product/supply from a supplier.
This issue has prompted criticism of the credit insurance industry but a couple of measures announced recently seek to address the issue and keep the supply chain running smoothly.
First, last month the ABI published a new “Statement of Principles on Trade Credit Insurance” which set out how trade credit insurers operate and what their clients (i.e. the suppliers) can expect from them.
All of the major credit insurers have signed up to the code, which aims to give an overview of how their risk assessments are made; a commitment to provide reasons for withdrawal or restriction in credit insurance cover; and a commitment to work with banks and companies to allow viable companies to continue to trade.
Hopefully this should enable greater transparency to the insurers' decisions, so that retailers can now find out more about the nature of any problems which may be causing concern and address them accordingly.
Second, a credit insurance “top up” scheme was announced in the Chancellor's Budget, which shows co-operation between the insurance industry and the government. This scheme has allocated £5 billion to help businesses whose credit insurance limits have been reduced.
This means that if a company's credit limit is reduced by its provider, it can top up its insurance back to the full amount required by buying additional cover through the Government's scheme. But while this is good news if retailers experience problems from here on in, for retailers which are already struggling and have suffered from credit insurance being withdrawn (or reduced before 1 April 2009), unfortunately there will be no benefit.
The credit insurance industry covers an estimated £300 billion of turnover, and the government scheme targets the UK supply chain.
However, while the two recent measures might seem limited, in combination they do highlight the issue and provide a means of getting practical assistance if problems do arise.
The increased profile of trade credit insurance highlights to retailers the importance of effective communication within the supply chain. Previously, the retailer was a passive part of the process but with insurers now more nervous the onus is on retailers to be more actively involved. Retailers need to ensure they have clarity on the perception of risk that suppliers and insurers believe they are taking, and communicate with all stakeholders in the supply chain to address concerns quickly and effectively.
Yes, this is another task to add to the list of retailers' actions. But as the withdrawal of credit insurance can have a significant impact on cash flows, stock availability or, in the worst case, on the ongoing viability of a retail business, it is certainly a crucial one that should not be ignored.
Tagged as: Trade credit insurance | Helen Dickinson | KPMG
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