Good credit insurance could mean business survival

Mar 25 2009 by Tom Scotney, Birmingham Post

As liquidity levels plummet, credit insurance is becoming a hot topic. Peter Castle looks at how the recession is hitting the insurance market – and what companies need to do about it

So it’s official. When UK domestic product fell by 1.5 per cent over the last three months of 2008, following a 0.6 per cent fall between July and September, those two consecutive quarters of negative economic growth meant one thing – recession. In the West Midlands, an average of 163 companies a month were in financial distress and facing the possibility of insolvency in the last quarter of 2008 – up 111 per cent compared with the final quarter of 2007.

Times are certainly tough for businesses. With stock markets plunging downwards, more than 40,000 companies UK-wide are likely to be declared insolvent during 2009, according to the Credit Management Research Centre (CMRC) – a hefty 35 per cent increase on 2008. And if the figure proves correct, it will represent an increase of more than 62 per cent on 2007.

Meanwhile UK unemployment rose to 1.97 million between October and December 2008 – an increase of 146,000 on the previous quarter and the highest level since 1997. Unemployment in the West Midlands is up two per cent from 5.7 per cent in December 2007 to 7.7 per cent in December 2008.

So it is clear that business owners and directors in the Midlands will have their work cut out over the coming months. There are many elements to surviving a recession – a steady hand on the tiller, diversification, adaptability, even luck. But not all the risks are obvious ones. A global recession can have unexpected side-effects and seemingly sensible decisions may contain hidden dangers.

As insolvencies inevitably climb over the course of 2009 – in the Midlands and across the UK – adequate credit insurance could mean the difference between your business surviving or failing. As much as 40 per cent of your company’s actual assets may be the money owed to you. What would happen if a major supplier or creditor went under?

The extent and nature of an organisation’s liability cover may be a tempting target for short-term savings in strained economic circumstances. Reducing an insurance policy’s limit of indemnity may produce limited premium savings, but will not only leave an organisation exposed to more risk, it could also damage the ability to win new business. Many organisations, particularly those operating in the public sector, have strict coverage requirements and include these in their supply contracts.

Redundancies of various kinds are bound to be on the agenda for many Midlands firms as the recession tightens its grip, however, laying someone off now costs more than it used to.

On February 1 2009, the maximum weekly statutory redundancy pay rate rose to £350 from £330 for each year of service, while the total maximum statutory redundancy award increased to £10,500 from £9,900.

The maximum award for unfair dismissal is now £66,200 – a hefty increase of £3,200.

They seem an effective way to cut costs in the short term, but consider and plan them carefully. Cut too much from your skills base and your company may struggle to meet its workload, or even to stay afloat altogether.

Ensure your business employs best practice in employment matters law. Recent rises in statutory redundancy pay rates now mean that lay-offs are more expensive than ever.

Additional costs are always unwelcome, but especially so in the grip of recession, so with the recent changes to redundancy pay rates, it will be especially important to ensure your business applies best practice in the field of employment law as 2009 continues.

Make any changes to insurance cover only after careful consideration – you need to be sure they will not affect your ability to win and retain business within your own business sector.

Be realistic about any premium savings obtainable from changes to your cover. Remember that your regulatory risk exposures do not recede in a recession. Take care of your staff. Don’t give them a reason to defect to your rivals by cutting back on training and risk management. Staff who feel neglected and dissatisfied are more likely to try to commit fraud than those who feel appreciated by their employers.

Finally, if there is one type of insurance that becomes even more necessary in a recession it is credit insurance, which can provide vital protection from the potentially terminal disruption of bad debt and late payment.

n Peter Castle is executive director of Bluefin Insurance Services.