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UK insolvencies failing to harden credit insurance market

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UK insolvencies failing to harden credit insurance market

The recent spate of corporate insolvencies in the U.K. is not enough to push up prices in the domestic trade credit insurance market, despite boosting claims levels to highs not seen since the financial crisis. But there are signs that a low point for prices is being reached.

Trade credit insurance protects suppliers against the risk of not being paid on time or at all. Companies going bust pose a big risk to their suppliers and by extension the suppliers' trade credit insurers.

Series of failures

The U.K. suffered a string of high-profile collapses in early 2018. Construction firm Carillion PLC went into liquidation Jan. 15, and electronics retailer Maplin Electronics Ltd. and the U.K. arm of Toys R Us Inc. both filed for administration Feb. 28.

They followed a series of failures toward the end of 2017, including those of Monarch Airlines and wholesale grocery supplier Palmer & Harvey. As a result, U.K. trade credit insurers paid out £225 million in claims in 2017, the most since 2009, according to the Association of British Insurers, a trade body.

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Credit insurance encapsulates a wide range of products, from domestic short-term trade credit insurance, usually provided by privately owned insurers, through to medium- and long-term global export credit business, provided by a combination of private insurers and government export credit agencies.

On the private insurance side, the trade credit market is dominated in Europe by three big companies — Amsterdam-based Atradius NV and Paris-based Coface SA and Euler Hermes Group SA (the latter a unit of Allianz Group) — although a range of other prominent insurers offer the cover, including American International Group Inc. and XL Catlin. The global private trade credit industry wrote €6 billion of gross premium in 2016, according to the International Credit Insurance & Surety Association, or ICISA.

QBE Insurance Group Ltd.'s head of credit and surety for Europe, Trevor Williams, said: "The last half and probably more intensely the last quarter of 2017 was perhaps the most active we have seen since 2008/2009 in terms of the level and volume of claims that are coming through, speaking from our own experience at QBE."

There could be more to come. Several firms, particularly major retailers, are showing signs of struggling. One example is carpet retailer Carpetright PLC, which issued a second profit warning March 1 and saw its shares fall 21% on March 19 after reports that it could agree to close stores as part of a restructuring.

"Carillion is not one of a kind and there may be more insolvencies in the construction sector," said Vinco David, secretary general of global trade credit insurance association Berne Union. "This is true of the U.K. but is also generally what our members see worldwide."

'Awash with capital'

But although increased claims, and the threat of more, usually push up insurance prices, this has yet to happen in the U.K. trade credit market. Ewa Rose, insurer Markel International's managing director of trade credit, political risk and surety, said that in the most loss-affected areas, such as U.K. retail and construction, "it is probably more difficult to get discounts," but that overall, "we haven't seen any material changes."

Globally, risks to trade credit insurers are also on the rise, according to Robert Nijhout, executive director of the ICISA.

"Our members expect a turn in the economy in the foreseeable future," Nijhout said. "It is to be expected that things will not stay as rosy as they were last year and are most likely to remain this year. On top of that, you have got trade wars and that sort of development and the fall-out of Brexit, which hasn't been quantified adequately either. These are all insecurities that we need to calculate in."

But, as in the U.K., these threats have not yet been enough to turn the market. This is largely because, as with most other lines of commercial insurance, there is an abundance of primary insurance capacity, and also plentiful reinsurance cover.

"The impact [from the recent spate of claims] has been less than you might expect because the credit reinsurance market is still awash with capital. It has not affected the pricing as much," said Richard Talboys, insurance broking group Willis Towers Watson PLC's executive director of political and trade credit risks.

Trade credit insurers also have not suffered any large, surprise losses that would push their claims ratios outside the usual zone, which is typically between 35% and 60%, according to Nijhout. Although Carillion failed while owing roughly £1 billion to trade creditors, the ABI said Jan. 25 that the claims bill for trade credit insurers was just £31 million.

An eagerness to write business is also keeping prices down, Talboys noted.

"It has been interesting to see that on the one hand, the underwriters have been trying to hold the line on pricing, but when they see a nice bit of business and they need premium there, they would show rather more flexibility than perhaps you would expect in the circumstances," he said.

Even so, there are signs that rates in U.K. trade credit at least will not fall much further.

"The overall feeling is that we are probably at a low point now," said QBE's Williams."We suspect that we will see rates beginning to be less soft and probably harden going forward as the market itself starts to adjust to the new claims that are coming through."