Government to the rescue, again?

It is understood that the government has begun a series of “crisis talks” with the UK’s leading credit insurers with a view to “maintaining or replicating” credit insurance cover for retailers in order to ensure they can maintain stock levels for the busy pre-Christmas period. Essentially the issue is this: suppliers will be extremely reluctant to provide retailers with stock on credit if they cannot get trade credit insurance – that is, cover protecting them against the company they supply going bust and not paying their bills.

It was reported this week that executives from credit insurance companies recently met representatives from the Department of Business Enterprise and Regulatory Reform to discuss how to “keep supply lines moving as credit lines dry up”. Among the options being considered by the government is offering state-backed credit insurance for companies unable to purchase such cover on the open market.

No decision has yet been made about whether the government will provide credit insurance cover, but it is understood further meetings are scheduled to take place between trade credit insurers and DBERR to discuss the issue.

Further evidence of the gargantuan task facing the government in trying to solve this problem emerged this week when leading credit insurer Euler Hermes – which reported a turnover of €2.1bn in 2007 – issued a profit warning. The Paris-based insurer said it expected net income for 2008 to total between €100m and €110m. The warning came despite the fact that, in November, Euler Hermes reported nine-month income of €152m and forecast a profit for the fourth quarter.

And what is causing the alarm at Euler Hermes? The collapse of Woolworths, the former UK high street favourite. In its statement explaining the reason for the profit warning, Euler Hermes pointed to the fact that, because Woolworths had filed for bankruptcy, the resulting “major claim” from its policy holders would have a “global negative impact” on its loss ratio.

Such a development means the government may have no choice other than to start offering state-backed credit insurance. If the collapse of one retailer results in a major credit insurer issuing a profit warning, it suggests that, if other major retailers got into difficulties, the future for some major credit insurers could look very bleak.