Let insurance bear the risks of recession

A grim UK Budget followed by increasingly grim news from world financial markets leaves no room for doubt that times are going to be a lot tougher financially as consumers and businesses alike clamp down on spending and lenders clamp down on credit. For most of us, the idea that books of US mortgage risks could change our own economic outlook so significantly and so quickly would have been hard to imagine six months ago. Now, the only question is how extreme and long term the fall-out will be.

Against such a background, maintaining stability and continuity wherever possible has to become a top priority. As ABI director general Stephen Haddrill commented in the wake of the Budget: “Consumers need to protect themselves, especially those who hold part of the UK’s £1.4trn of consumer debt. They should review their finances and consider whether to insure themselves against losing their job or becoming ill.”

UK businesses need to be carrying out similar health checks. When trading environments are tough the first reaction can often be to minimise additional costs, such as insurance. But in reality, this is exactly when companies need to be thinking hard about how to recession-proof their businesses.

One of the most prevalent causes of business failure is not insolvency per se, but cash flow. Given that trade credit receivables represent, on average, 40% of UK companies’ assets, it is little surprise that in times of economic slow down even the most well-run companies can become prey to the knock-on effect of cash flow difficulties among customers.

In such an environment, trade credit insurance can offer both cash flow and balance sheet protection, making businesses better able to withstand customer insolvencies and the vagaries of chronic slow payers, which push credit periods beyond policy waiting periods.

Just as important is the additional value such insurance brings in terms of insurers’ continual assessment of buyer risks. An effective early warning system for policyholders, this support instils greater discipline in companies’ credit control processes and assists businesses to avoid poorer quality debtors.

Such superior customer intelligence can also help businesses to monitor and manage existing relationships, and to better direct their marketing strategies in response to changing market dynamics.

“Policyholders who have placed value on continuity, rather than treating insurance as a spot market, should be able to rely on the support of their insurance partners.

Terry Whittaker

But trade credit is only one part of the picture. The recent winter storms have again highlighted the issue of business continuity and business interruption – a risk which many businesses are far less well able to withstand when money is tight. Equally, with insurers looking more closely at their margins, the next few months may be a good opportunity for insurance buyers to achieve some pricing certainty by opting for three-year deals on employers’ and public liability covers.

Now too is the time when insurers can truly prove the worth of their proposition. Policyholders who have placed value on continuity, rather than treating insurance as a spot market, should be able to rely on the longer term support of their insurance partners.

Similarly, insurers must stick to their principles and deliver fair, responsive claims services. Clamping down on the flow of valid claims payments simply because times are tough – the classic sign of a soft market starting to bite­ – devalues the insurance product.

This emphasis on continuity will be even more important for clients if the economic slow down proves to be prolonged. Insurance markets may currently be soft, but they will not remain so indefinitely.

Indeed, speculation is already building that a turn could be seen sooner than anticipated if we now see a combination of lower than expected 2008 investment returns and higher losses.

Terry Whittaker is managing director, UK national, at QBE European Operations.