In the current environment, business leaders we conducted research amongst cited bad debts as one of their biggest concerns1 and in 2019 over 17,000 businesses became insolvent2, the highest number since 2013 and this was even before COVID-19 hit. With the significant economic impact of the coronavirus and subsequent enforced lockdown leaving many businesses with an uncertain future, it is likely that this number will significantly ramp up in 2020 and 2021. Views vary but one expert3 has predicted corporate insolvencies could grow 2.4% in 2020, a pronounced acceleration from the 1.4% increase recorded in 2019, largely resulting from the coronavirus outbreak.
As a result trade credit insurance has never been more relevant. Trade credit insurance helps protect businesses if customers in the supply chain who owe money for products or services do not pay or become insolvent.
Cover can be obtained by companies trading within the UK and internationally, and brokers that offer trade credit will help their customers manage risk by providing guidance and advice about credit risks and new markets to help businesses expand. Businesses can buy trade credit insurance to cover all their customers defaulting, or for individual accounts or projects.
With trade credit insurance, the policyholder knows their business is protected against financial risks that are beyond their control and that money owed to them will be paid. This helps firms to grow profitably and minimises the risk to them of unexpected customer insolvency.
Tim Fisher, Managing Director of Trade Credit Insurance at Gallagher, said: “Insurance can be seen as a necessary evil – something that businesses must have but rarely use, but trade credit insurance is different. The whole purpose of the cover is to give businesses the ability to trade confidently and take calculated risks knowing that they are protected when a customer or businesses in the supply chain runs into financial trouble. This means they can trade in existing markets or expand into new markets, where there may be different risks and factors to consider, knowing they have payment guarantees in place.”
The trade credit industry provides significant support to British businesses and this is borne out by the Government’s decision to put in place a reinsurance scheme to ensure the availability of trade credit insurance as businesses recover from the impact of COVID-19. The scheme aims to help the economic recovery by ensuring the continued availability of trade credit insurance in the face of financial pressures currently being experienced across most business sectors. It will help trade credit insurers to continue to provide cover for a wide range of businesses across the country by maintaining levels of cover than they otherwise would not have been able to do.
Looking at the most recent figures available on the size of the support that trade credit insurers give to UK businesses, the numbers are stark.
In the most recent figures available from the Association of British Insurers4, insurers paid out £271 million to business in just three months, helping protect businesses against bad debts. The average claim in the third quarter of 2019 was over £67,000, which is high as it was influenced by the collapse of Thomas Cook at the time, although it goes to show how impactful these debt issues can be on businesses. Very few smaller businesses could withstand a debt of this size, meaning many thousands of businesses have been able to continue trading successfully as a result of having this cover in place.
Tim Fisher, said: “Trade credit insurance is relevant for both large and small businesses, particularly in an unstable economy. Gallagher is one of the largest trade credit brokers in the UK and was first established in 1973. Our experienced credit risk insurance specialists help to protect the cash flow of a wide range of companies, from small businesses needing simple policies to multinationals requiring innovative global solutions.
“Our brokers work with clients to understand their risks to their business and advise on the type of cover which is most appropriate. We can offer whole portfolio cover or flexible cover that works on an individual risk basis. For example, should a business be considering a new major project, but has concerns about the solvency of the customer, they can insure this as an individual invoice. This type of cover is cost effective for smaller businesses that are working with a new customer or on a major project which they could not withstand non-payment. Ultimately our aim is to help provide businesses with peace of mind to help them trade securely.”
1. All data unless otherwise stated from research conducted by Opinium on behalf of Gallagher, between 26 June and 3 July, amongst 1008 senior decision makers in businesses employing over 250 people.
This note is not intended to give legal or financial advice, and, accordingly, it should not be relied upon for such. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. In preparing this note we have relied on information sourced from third parties and we make no claims as to the completeness or accuracy of the information contained herein. It reflects our understanding as 08/09/2020, but you will recognise that matters concerning COVID-19 are fast changing across the world. You should not act upon information in this bulletin nor determine not to act, without first seeking specific legal and/or specialist advice. Our advice to our clients is as an insurance broker and is provided subject to specific terms and conditions, the terms of which take precedence over any representations in this document. No third party to whom this is passed can rely on it. We and our officers, employees or agents shall not be responsible for any loss whatsoever arising from the recipient’s reliance upon any information we provide herein and exclude liability for the content to fullest extent permitted by law. Should you require advice about your specific insurance arrangements or specific claim circumstances, please get in touch with your usual contact at Gallagher.