Trade credit in Britain is worth billions of pounds, reaching well into the trillions globally. During boom times, credit insurers earn easy profits, since few firms default on their payments. But now during recession, it seems, credit insurers are creeping out of their responsibilities to avoid possible payouts.
Woolworths was considered to have it’s flaws, but it wasn’t until credit insurers turned their backs on the much-loved Woolies that the collapse became inevitable. Businesses that supplied Woolworths all demanded payment upfront … and stocking over 800 stores nationwide for Christmas without a credit facility would bankrupt practically any company!
JJB Sports and DSGI – which owns giants such as PC World and Currys – have all had their credit insurance policies cancelled causing share prices to plummet by up to 30% in some cases.
Leading credit insurers Euler Hermes, Atradius, and Coface, who have a combined 80% global market share, have also significantly reduced the cover they offer after having to make huge payouts to struggling companies — including refusing coverage for suppliers of American car manufacturers General Motors and Ford Motors. To top it all, they also cancelled over 12,000 insurance policies in November alone.
So how are our friends across the waves coping? Well, Circuit City, the number two retailer in America, filed for bankruptcy owing suppliers Hewlett Packard and Samsung a combined $234 million. With those kind of figures being thrown out it’s hard not to see the knock on effects this is all going to have. Credit insurers, by withdrawing cover to stop themselves going bankrupt, have turned businesses against each other forcing many of them to go bankrupt instead.
Are credit insurers right to dump businesses in their time of need? After collecting billions in insurance premiums in the good years leading up to this recession it’s difficult to see why governments are not more critical of insurers abandoning their customers when times suddenly get tough. If you had paid thousands in volcano insurance over the years only to have your insurer ring you up to cancel the policy as hot lava is heading towards your home, you’d be pretty furious!
But what happens when an insurer is in trouble? American International Group required a $113 billion bailout from the US government after losses stemming from its role as a major underwriter for the American subprime mortgage industry. The knock on effect from that has been immense.
So sadly, we have to agree with Gordon Brown.
The solution to help businesses is for people to spend money. The wheels of the economy go either backwards or forwards, there is no standing still. Unlike gold and diamonds, money actually loses it’s value the longer you keep it.
If a few thousand people cancel their pet insurance policies to try and save money then that is a few dozen insurance workers that will lose their jobs. And will you really have saved any money in the long run? Every one of these individuals that lose their jobs are going to be claiming millions in unemployment benefits — that money will have to come from somewhere. Pay for them now or pay for them later – it’s your choice.
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