Suppliers and retailers have suffered from the reduction or withdrawal of credit insurance, but the government’s answer to the problem, a top-up scheme, fails to convince
When Chancellor Alistair Darling announced his Budget for the UK economy, which is in its worst recession since 1945, the fashion trade was waiting with bated breath. It was hoped the Budget would ease the pressure on businesses caused by the cut in credit insurance - an issue the sector has grappled with since the downturn took hold.
The government’s response, announced in last Wednesday’s Budget, was a £5 billion top-up scheme, agreed with insurers Atradius, Euler Hermes and Coface, which will see the government match insurance cover provided by the private sector.
Since the economic downturn, suppliers and retailers have been severely hit by the reduction or complete withdrawal of credit cover, which insures suppliers against non-payment by retailers. The situation has been a nightmare for the industry as nervous insurance companies made seemingly knee-jerk reactions about the health of the retail sector, pulling cover to businesses regardless of trading performance and cash position. As a result, suppliers have been forced to make difficult decisions about whether to supply uninsured, switch payment terms to pro-forma or letters of credit, or in some cases cut orders from their books, damaging the bottom line.
The top-up scheme will see the government match the cover that insurers are willing to provide. So, if cover has been cut by 50% from the original level, the government will top it back up to 100% of the original level of cover. For example, if cover is cut to 40%, it will be bumped up to 80%. If it is cut to 30%, it will be increased to 60%, and so on.
The government’s scheme, which follows much lobbying from the fashion industry - led by the British Clothing Industry Association’s campaign which was backed by Drapers - has been met with widespread criticism from the sector for not going far enough. One big concern is that the scheme will not provide any cover where it has been withdrawn completely.
Simon Berwin, chief executive of menswear supplier Berwin & Berwin, typified the response of many suppliers contacted by Drapers this week. “It’s remarkable that this is what the government has come up with, after having consulted with the insurers,” he says. “It’s of very limited use. We deal with groups that have had their cover completely withdrawn and this does nothing to help them. The insurers have had their premiums through the good years and now that it’s raining they’ve taken the umbrella away.”
German womenswear business Gerry Weber’s country manager for the UK and Republic of Ireland Howard Ross says the scheme is unlikely to help the company. “About 99% of the issues we’ve had are with cover being withdrawn completely, so this scheme won’t help that,” he says.
Another bone of contention is the fact that the scheme only applies to reductions in credit cover since April 1, despite the fact that suppliers have been suffering with withdrawals and reductions since early 2008.
Pan Philippou, chief executive of World Design and Trade, the group which owns the Firetrap and Fullcircle brands, welcomes the government’s recognition of the issue but fears the scheme could have little practical value.
He says: “It only starts from April but we’ve been agonising for months about whether people are going to pay. We’ve lost a whole year effectively. Spring’s sell-through could be hit because we had deliveries on hold pending credit decisions. We’ve already placed our orders for autumn [with the factories] and our stockists have already placed theirs with us, so this is too late.”
Trade bodies including the British Shops and Stores Association, which represents independent retailers, and the British Retail Consortium, which serves the high street, have also expressed disappointment, with the latter slamming the scheme as “too little, too late for the retail sector”. In addition, the cover provided by the government will not be free. Businesses will have to pay a 2% premium for the cover, which will last six months.
Susan Ross, account director at insurance broker Aon, warns that this could be prohibitively expensive. “It’s fantastic that the government has done something but it would be better for it to be a bit broader and a bit cheaper. The UK scheme is similar to the French one launched last year, except it’s more expensive. Le CAP [the French scheme] costs 1.5% per year while the UK scheme is 2% for six months. Do policyholders have the margin to be able to afford it?”
Businesses wanting to benefit from the scheme will have to first contact their insurance broker or company, as the extra cover will be provided via the existing insurer. The scheme’s success will also undoubtedly depend on how easily it can be accessed by suppliers and the fluidity of the application process.
Aon’s Ross says: “You need to have a good distribution mechanism for the scheme. The policyholder should call the broker in the first instance and we can take them through the advantages of it and how it will work for them, and help them access cover.”
Some industry operators say the underlying problem surrounding the cuts in cover still remain. Gerry Weber’s Ross says: “Decisions about cutting cover are often nothing to do with a company’s ability to pay,” he says. “We’ve had cover cut on some retailers, while other suppliers haven’t.”
Bobby Lane, partner at accountancy firm Shelley Stock Hutter, says insurers’ unwillingness to maintain cover has other knock-on effects on a business’s cash flow, especially those that rely on invoice finance, where banks and finance houses quickly turn invoices into cash. “The link between credit insurance and invoice finance houses is important,” he says. “Retailers use invoice financing to fund working capital and cash flow. But if you can’t get credit insurance, invoice finance houses won’t lend.”
So while the government has offered some support, anxious times look set to continue for the industry. Berwin says: “We’ll have to go back to 20 years ago when there was no insurance and it worked on trust and a stronger relationship between suppliers and customers, and we’ll save the premium.”
Top-up scheme details
- Applications should be made via your existing broker or insurance provider
- Applications must be made within 28 days of cover being reduced
- The scheme is available for reductions in credit cover occurring from April 1 onwards
- Full cover must have been in place for at least 30 days before reduction is imposed
- Businesses with no cover are not eligible
- The scheme only covers trades in the UK with payment terms under 120 days
- Cover is for six months and up to a value of £1 million
- The scheme came into effect on May 1
According to the Association of British Insurers, trade credit insurance claims rose by 51% year on year in the last quarter of 2008 across all UK industry. Last week it issued guidelines on what insurers’ clients can expect from them, including:
- An explanation of how risk assessments are made
- Reasons for a decision to stop or reduce cover
- A commitment to maximising companies’ potential to trade
Businesses must provide:
- Recent trading accounts
- Business plans
- Cash-flow projections
- Funding and banking arrangement details
- £5bn Value of the government’s investment in the top-up scheme
- 2% Premium charged for accessing the scheme
- £1m The maximum value eligible for cover
- Six Number of months cover is valid for