Withdrawal of Credit Cover to the UK Retail Industry: A Case on Credit Crisis

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"What was seen as a good risk quite recently has deteriorated very swiftly indeed. It's a deep and abrupt adjustment. Policyholders are saying that their customers are not going bust but are going delinquent, paying their bills a lot later than they should. I think businesses of all sizes and particularly small businesses should radically reassess their credit control. The judgments that they have been using in the past three to five years, perhaps those criteria are not robust enough in the new risk climate."¹

- Phil Prunty, Director, Coface², November 11, 2008.

"The role of the credit insurers is to protect the smaller suppliers. Withdrawing credit cover is often the catalyst to have discussions over continuing trading in cash terms or reduce the rates of the terms because the balance of risk is too high. We will continue to see some withdrawals in all sectors. Retail is quite volatile but there are a lot of other cases [such as] construction companies or autos where demand is reducing, so they are a big concern as well."³

- Fabrice Desnos, Chief Executive of Euler Hermes UK⁴, October 08, 2008.

Introduction In November 2008, the retail sector in the UK faced a major financial crisis. The leading credit insurance companies in the UK - Euler Hermes, Atradius5 and Coface withdrew credit cover to over 12,000 businesses in the span of a week. The global financial meltdown6, the deepening economic recession7 in the country, and the downturn in the insurance industry with the number of claims rising at an alarming rate, were cited as the reasons for the withdrawal.

Withdrawal of Credit Cover to the UK Retail Industry: A Case on Credit Crisis - Next Page>>

1] Richard Tyler, "Trade Credit Insurance Withdrawal Bites," www.telegraph.co.uk, November 11, 2008.

2] Compagnie Française d'Assurance pour le Commerce Extérieur (Coface) is the world's third largest credit insurance company with market share of 29 percent as of 2007. The company's business interests ranged from insurance and related services to trade receivables management, business information, trade receivables financing and public procedures management. In the financial year 2007, the company reported revenues of € 1.57 billion and net profit of € 204 million.

3] Kieran Stacey and Elizabeth Rigby, "Credit Insurance Takes Centre Stage," http://uk.biz.yahoo.com, October 08, 2008.

4] Euler Hermes is the world's largest credit insurance company with market share of 36 percent as of 2007. Its primary business is to provide insurance to companies against buyer insolvency also termed as credit insurance. It had provided credit insurance to over 40 million companies spread across 50 countries worldwide. In the financial year 2007, the group reported revenues of € 2.09 billion and net profit of € 407 million.

5] Atradius NV is the world's second largest credit insurance company with a market share of 31 percent as of 2007. The company's credit insurance business was spread across 40 countries. For the financial year 2007, the company reported revenues of € 1.8 billion and net profit of € 164.2 million.

6] The world economy faced a severe financial meltdown characterized by record losses reported by a number of financial institutions due to sub-prime mortgage crisis in the US and crashing stock markets globally, beginning 2008. The financial meltdown had an impact on the real economy with many companies cutting jobs across sectors leading to rise in unemployment rates and fall in consumer spending. The crisis spread to other economies worldwide in 2008 and early 2009.

7] The UK Office for National Statistics, the government body that publishes statistics for the UK economy, reported a decline in Gross Domestic Product (GDP) by 1.5 percent in the last quarter of 2008, followed by a 0.6 percent contraction in the third quarter of 2008. Contraction in GDP for two successive quarters is officially termed by economists as economic recession.

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