Update Jan 2021: This article is from 2013, but is as valid today as it was for Opco’s insolvency.
One of the recurring questions over credit insurance is “how is it right that credit insurers can reduce or remove cover on a company where they had previously agreed cover?”
The answer; part of the value of a credit insurance policy is that the credit insurers are constantly monitoring credit limits and are working with their policyholders to help them avoid bad debts – not simply to allow bad debts to happen and then pay claims. If the credit insurers know that a company that you are trading with is heading towards insolvency, do you want them to tell you and work with you to trade out of that risk? Or not tell you and let you incur the bad debt?
A prime example of this situation is Opco Ltd, a construction company that went into administration on 17 June 2013. Opco Ltd’s last filed accounts were to year ended 31 August 2011 and showed £31m turnover, a modest profit and a net worth of £2.26m. Risk Disk (now owned by Experian) were recommending a £226k credit limit as recently as 23 April 2013. If a supplier had taken an order in April and offered credit terms on the basis of the Risk Disk recommendation, the account would (typically) have been due for payment at the end of May and only 17 days overdue by the date of administration.
The credit insurance market had better information. Credit insurers are informed of late payments by policyholders and will also track the level of requests for cover on a particular company. In the case of Opco, we were told that the insurers were picking up reports of late payment as long ago as last autumn and a higher than usual number of new requests for cover. This started alarm bells ringing – some insurers made direct approaches to Opco to ask for explanations and to request up to date financial information.
I understand that information was provided (on a confidential basis) and that this information caused further concerns. The credit insurers reduced the level of cover available on Opco from autumn 2012 through to spring 2013 and stopped offering any new credit insurance cover early in 2013. Credit insured suppliers reacting to this information could complete any current contracts, collect in their debts and be clear of any exposure to Opco prior to 17 June.
We at The Channel Partnership have had claims in from suppliers to Opco – either residual balances outstanding or for on-going works where credit insurers continued to provide cover to allow for contracts to be completed – but at far lower levels than if our credit insured customers had not been forewarned of Opco’s difficulties.