The number of firms in the industry applying for cover has doubled over the past 12 months, according to Marsh, an insurance broker and risk advisor.
But premiums are rocketing and applications are being denied. Insurers’ losses are currently exceeding 60 per cent of premiums, compared with an average of 40 per cent between 2002 and 2007.
Credit insurance covers businesses against the risk of bad debt due to the insolvency or default of their customers.
Around 25 per cent of all credit insurance policies are bought by companies in the construction industry.
But insurance experts estimate that the number of trade credit insurance policies issued could fall by as much as 5 to 10 per cent.
Construction News revealed last month that the cost of credit insurance policies was increasing for subcontractors working with the major house builders.
Tim Smith, head of Marsh’s trade credit practice, said: “As the recession takes hold more and more companies now seek the relative protection and enhanced credit management procedures that a trade credit product can bring to their organisations.
“However, the current volatility, particularly in the construction sector, is driving changes in underwriters’ behaviour and appetite for credit insurance.”
“Insurers have become increasingly cautious in their approach to new business acquisition and are far more rigorous in assessing the risks associated with customers.
“This makes it more challenging for firms to secure trade credit insurance.”
Shaun Purrington, a director at Atradius, one of the big three credit insurers, said: “Construction is one of the sectors we feel very uncomfortable with.
“We could see good companies failing because they run out of money and liquidity.”
Major construction credit insurer Euler Hermes has warned that business failures in Britain are set to rise by more than 50 per cent in the coming year.
Credit insurance is especially important for the construction market because of the risky nature of the industry.
Materials are sometimes needed long before profits are made, and, to mitigate against the possibility that buyers will not be able to pay for items already delivered, suppliers take out insurance policies against defaults or late payment.
Analysis: Your customers can put the insurer at ease
By Lee Manning
The trade credit insurers are looking long and hard at house building and other areas of construction that are deemed to be suffering.
They are in the business of writing insurance policies. By reducing the number
they issue, their turnover may be suffering but their losses will have been
Companies looking for trade credit need to demonstrate to the insurer just how critical they are to the supply chain and then they will be looked after.
Presenting audited accounts is no good, they will not show anything.
It is far better to show up-to-date management accounts.
But it is also a good idea to get your customers to speak directly to the credit insurer to convince them you are good to do business with – it will give assurances to the insurer and put them at ease.
In effect they are lending you money and it is about making them feel secure
Lee Manning is a partner in Deloitte’s restructuring group