October 16, 2019 / 2:45 PM / a month ago

Brexit insolvency fears boost demand for trade credit insurance

LONDON (Reuters) - Companies are stepping up purchases of insurance to protect themselves against insolvencies in Britain, industry sources say, in part due to concerns about the impact of Brexit.

FILE PHOTO: A shipping container is lifted at Felixstowe Port, Britain April 16, 2019. REUTERS/Chris Radburn/File Photo

The UK economy is feeling the pinch from the political uncertainty, which has hit consumer spending and led to a drop in the value of the pound.

This has contributed to high-profile company collapses like that of travel firm Thomas Cook, which also suffered under the weight of its debt pile.

UK insolvencies rose by 12% in the second quarter compared with a year earlier, according to government figures, bringing insolvencies to their highest level in five years.

This has fueled interest in trade credit insurance. Companies buy such insurance if they supply goods or services to other businesses on credit, to protect against the risk they will not get paid, or will be paid very late.

An example could be a Dutch flower seller supplying a British supermarket chain, buying insurance in case of non-payment.

“The demand for credit insurance is incredibly high,” said Graham Bristow, managing director in credit solutions for insurance broker Aon, one of the largest firms arranging such deals. “There is no doubt Brexit is one theme, people are nervous.”

   The insurance broker has seen double-digit percentage growth in demand for trade credit insurance compared with 2018, and a similar increase in enquiries on top of that, Bristow added.

Richard Marriage, managing director in trade credit at insurer Nexus, said the firm had seen a 10% rise in enquiries this year, with the prospect of Britain failing to reach a negotiated withdrawal from the European Union - a so-called no-deal Brexit - one factor in the increased interest.

EU exporters to Britain were interested in the insurance, in addition to UK buyers, Marriage said.

Insurer Atradius has seen a 5.5% rise in its customers this year, and credit periods have shortened in Britain. The demand for quicker payment is another sign of the concern about Brexit, said Stuart Ramsden, Atradius’ head of UK & Ireland Commercial.

PREMIUMS RISING

There were 14,000 trade credit policies in place last year, the most since the 2008 financial crisis, the Association of British Insurers said. The number of claims rose 60% from 2017.

Bristow and Marriage said premiums were rising, but declined to give a figure.

Another insurance source said rates were up by single digit percentages, helped by a broader trend for rising insurance premiums. There were double-digit price rises in sectors such as retail, the source said.

In addition to sterling’s fall, which has pushed up the cost of imports, a switch to online shopping and food delivery and high business rates have brought pain to British retailers such as Debenhams and restaurant owners such as Jamie Oliver.

Agriculture was another area of concern, with Brexit likely to lead to the removal of farming subsidies currently provided by the EU.

“Some politicians have said ‘we will replace them’, but when and how?” Bristow asked.

Other industry sources pointed to construction, logistics such as delivery firms, the auto industry and food wholesalers as also at risk.

If there is a no-deal Brexit, supply chains are likely to be disrupted, risking more insolvencies. Alexis Garatti, head of macroeconomic research at trade credit insurer Euler Hermes, predicts UK insolvencies could rise by 15% next year under a no-deal Brexit. He put the probability of a no-deal Brexit at 40%.

British insolvencies, seen by Euler Hermes as rising by 11% in 2019, are running ahead of the global average of an 8% increase, Garatti said.

Despite the risk, small businesses find it hard to buy trade credit insurance because of the cost, industry sources say, as they often have to insure the whole of their order book.

Lack of insurance could hit small business growth, according to Nimbla, which insures individual invoices against default.

A survey by Nimbla showed more than half of UK small and medium-sized firms turned down new business because they were worried about its credit quality.

Reporting by Carolyn Cohn; Editing by Mark Potter

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