AIRMIC Live outlines key credit and fraud risks in a recession

AIRMIC hosted its second live phone briefing on the current economic turmoil. Below is a summary of some of the main points discussed.

Nick Hedley, chairman of financial risk at Jardine Lloyd Thompson, began by giving listeners an outline of the credit insurance market. He said the market was extremely volatile.

Companies are having problems protecting their own trade ledgers, supplier insurers are sometimes hacking back their terms, and there is also a potential disruption to working capital, he said.

‘It is no longer possible for companies to cover their own balance sheets in a satisfactory contract certainty manner,’ said Hedley, adding: ‘Certain industries are almost impossible to cover, like retail and construction. And cover is fairly meaningless anyway because insurers can pull it without a moments notice.’

There is also vulnerability to credit insurers removing cover from a company they believe is in trouble, which could lead to suppliers asking for up front payment, he said.

Most of the difficulties are focused on the traditional whole turnover market, where the main players are Atradius, Coface and Euler Hermes. Hedley said these insurers have taken advantage of their strong position to dictate credit limits on customers and dramatically reduce their exposures—leading to a hacking back of cover in certain industries.

‘There is a huge pressure on insurers, from rating agencies, to take disproportionate action to try and minimise their credit exposures,’ he said.

On the other hand the excess of loss market dominated by AIG, HCC Global, Lloyd’s of London and Zurich, has not seen such widespread withdrawal or cancellation of cover, he added.

Hedley also raised awareness about the solvency of certain credit insurers, highlighting Atradius’ recent downgrade to A- with negative watch. ‘It is a pretty sorry state of affairs,’ he reported.

Hedley suggested there would be a further contraction of the credit insurance market but he also said the hardening market represented an opportunity for newer, smaller players.

Fortunately, Hedley outlined some possible solutions to these problems.

If a company is refused cover from the big three trade credit insurers they can look at an excess of loss structure, he said. ‘That market is still open and prepared to provide cover. But they will require companies to take a large deductable,’ he added.

“It is no longer possible for companies to cover their own balance sheets in a satisfactory contract certainty manner.

Nick Hedley, chairman of financial risk at Jardine Lloyd Thompson

Hedley suggested a way to reduce reliance on credit insurance—by entering into an agreement whereby a supply chain financing bank agrees to pay a company’s suppliers immediately and the company agrees to pay the bank back within 90 days. ‘That means your suppliers no longer have a credit risk on you and they won’t need to buy credit insurance. Companies may also be able to negotiate better terms with their suppliers,’ he said.

Companies can enhance their credit insurance programmes by syndicating the risk amongst more than one insurer, so if one runs into solvency difficulty there are others ready to take up the slack, advised Hedley.

If they are unable to secure trade credit cover Hedley recommended that companies consider establishing a captive. In certain industries if the captive is properly capitalised with a reasonable diversity of risk it could be an acceptable way of underwriting credit risk, he said.

Be prepared for fraud

Gavin Robertson, senior partner at Robertson and Co. Commercial Investigation, said risk managers need to pay particular attention to the likely increase in employer’s liability, particularly in the run-up to redundancies, and third party motor claims. He also warned risk managers to be aware of staged personal injury claims.

Identifying and investigating fraudulent claims at an early stage will pay off, he said.

During the recession companies will also see an increase in property related crime and internal fraud, said Robertson. Of particular note was his warning that companies should refrain from reporting fraud straight to the police. They should first pursue civil remedies instead, he said.

Risk managers should work with HR to monitor rates of absenteeism to prevent employees looking for work elsewhere while claiming sick leave, he added.

Companies should be prepared for key supplier or customer failures during a recession. ‘Act proactively to identify a suitable replacement,’ said Robertson. They should request copies of their supplier accounts on an annual basis, he said. Robertson recommended that buyers investigate The Registry Trust where they can carry out online inquiries about the performance of any supplier they are concerned about.

Data and intellectual property loss also represents a risk during the recession, warned Robertson.

The event was chaired by John Hurrell, chief executive of AIRMIC and Sue Copeman, editor, StrategicRISK.