Safeguarding against debt

In a brave new world of business, Euler Trade Indemnity chief executive Russell Benzies explains the importance of credit insurance to Alison Boyle.

Figures out last week revealed that the UK economy grew by less than originally thought over the July to September quarter. The official estimate for growth in UK economic output, or GDP, for the period has been trimmed from 0.6% to 0.5%.

Yet analysts had feared UK growth for the July to September period, which includes the aftermath of the terrorist attacks in the US, would be far lower.

There are also some factions saying the fundamentals of Britain's economy are holding up well and that companies are in better shape than ever before to weather a slowdown.

However, through these times of confusion, one thing is certain - British industry needs all the security it can get its hands on, especially following the fall of Railtrack and, closer to home, the collapse of Independent Insurance.

Step in credit insurance. Even without the added pressure of the current climate, unforeseen insolvency can have serious consequences on business. What credit insurance aims to do is safeguard a company against bad debt, provide an early warning that a customer is in financial difficulty and help target new customers in addition to monitoring existing clients.

Indeed, Euler Trade Indemnity, the UK's largest credit insurer, has seen claims rise by 20% over the past year.

Getting real
Euler chief executive Russell Benzies says post-11 September, there is greater realism about the economic situation.

He says: "Before 11 September, when we shouted about the fact the economy was having problems and life was going to be difficult, people would say `well, they would say that, wouldn't they', because they saw us as having a vested interest. There is now realisation that it is OK to say times are tough."

Tough though times are, reports that the UK is on the brink of a recession annoy Benzies. "I get really irritated when people get hung up on two quarters of negative growth. Now we live in such a global world, we are very sector-specific. If your sector takes a downturn, you need to be more concerned about this than if the UK has two quarters of negative growth."

This view echoes that of Confederation of British Industry director general Digby Jones. He recently said there was a big difference between slowdown, challenging times and recession and that he didn't want people talking themselves into something which wasn't actually there.

Benzies adds: "The question of whether we are in a recession or not is completely academic as far as I am concerned. You try to tell manufacturing companies in UK that the past two years have been good - some are doing OK and some aren't.

"The UK economy is very unusual, as it has a huge financial services sector and a big services sector. There are whole sectors in our economy that have gone through massive reduction and the economy has kept going because other things have replaced them - that's natural. But if you are in one of those industries and you are going through tough times, it doesn't matter if the government is saying we are not in recession, because you are saying things are pretty damn tough."

He says financial services and consumers heavily support the economic position in the UK. "I believe the consumer is still the key driver of the economy. Certain businesses will do well through the Christmas period, as many people will want to spend money to forget, both in the US and Europe, and other industries won't."

But what sort of companies will be affected most by recent events? Benzies says it is hard to gauge as, across the UK, insolvencies are rising, profit warnings are increasing and company's finances in all sectors are under increasing pressure.

He says 11 September added to the situation by giving commercial risks and costs of bad debt greater prominence than ever on company executive agendas.

"What we saw in 1991 and 1992 and what we are beginning to see again is it is not always bad companies that go bust," he says. "There was a view before the 1990s that those companies were badly run and their collapse came as no surprise. That's not the case now. There is the moral hazard and also situations where parent companies don't support subsidiaries. We have had a number of claims this year where even we were surprised, as the prior record by the parent was to bail the subsidiary out. But things change as times get harder and liability exists for a reason.

"The other thing today is the speed of collapses. In the past, companies gradually fail, but now they fail very quickly. Who would have thought Railtrack would go bust that weekend? I didn't."

Demonstrating value
This past year, Euler's increase in claims has forced it to take a realistic look at the rates it is charging.

Benzies says it is unrealistic to expect insurance rates to remain stable when the risks insured are rising.

He adds: "Everyone is concerned about their costs and people do look at the price and the service. But you don't value the service until you need it.

"If you renew your household insurance through a broker each year and you don't have any problems, you wonder if you should go direct. However, if you have a claim, that's when the broker becomes someone you really need. If it's problem-free, it's difficult for us to show our added value.

"Ours is a business when you really find out who your friends are when times get tough."

It looks like that time has arrived.