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Insurance that worsens crunch

Robert Peston | 00:01 UK time, Monday, 12 January 2009

An essential element in the government's forthcoming package to stem the pernicious shrinkage of credit in the economy will be measures to compensate for the devastating impact on many companies of the withdrawal of trade credit insurance.

That probably sounds deeply dull and technical. But please read on, because this stuff matters to all of us.

For smaller companies, the importance of trade credit insurance is often that they can't borrow from banks, unless they've insured their sales to corporate customers.

The banks make this stipulation because it absolves them from having to assess the credit-worthiness of their borrowers in detail - because at least part of the credit risk has been laid off to an insurance company.

So the availability of such insurance is literally a matter of life and death for many businesses.

Woolworths is one of the more extreme examples.

When insurers would no longer provide cover to Woolies' suppliers in the autumn, that was the penultimate nail in the coffin of the ailing general retailer - because suppliers insisted that Woolworths pay cash upfront to them for orders, which meant that Woolies was forced to draw on its borrowing facilities, which in turn took the retailer up to the limit of what its bankers were prepared to lend.

And the rest is the sorry story you know: the demise of a historic high street name that was forced to liquidate everything so that the bankers could get their money back.

The point is that trade credit insurance is central to hundreds of billions of pounds in trade and the provision of finance to companies of all sizes.

When it's withdrawn, as has been happening for months, small companies are unable to fulfil valuable orders placed by big companies and those bigger companies lose access to vital supplies.

So a rational decision by insurers to scale back their cover on sales to companies perceived as vulnerable to our economic contraction is rippling through the economy in a damaging way: cover is being withdrawn because we appear to be in a sharp recession, and its withdrawal is making that recession significantly worse.

Part of the problem is that the insurers seem to me to have massively underpriced the cover they provide. Just as banks charged ludicrously low rates of interest during the years of the credit bubble, so the trade credit insurers insured hundreds of billions of pounds of trade for tiny premiums.

According to statistics from the Association of British Insurers, there were £334m of premiums written by the insurers in 2007, covering £282bn of sales by British companies.

Or, to put it another way: insurers were receiving premiums equivalent to the turnover of a medium-size business to protect more than 20% of the output of the entire British economy.

Scary or what?

Those aggregated premiums were equivalent to a minute 0.1% of the sum insured - down from 0.26% in 1995. Which would only make economic sense in a world where there are never recessions.

One illustration that the premium was too low is that claims received by insurers in 2008 are likely to have been rather more than total aggregated gross premiums received in the previous year, extrapolating from trends in the first nine months of the year.

But the insurers have been protecting themselves from the worst losses by simply withdrawing cover for new orders to companies seen as weak. In other words, unlike insurance provided to you and me on our homes, for example, the trade credit insurers have been able to withhold protection as soon as they detected stormy conditions.

To restate the painful paradox: insurance designed to give confidence to companies that they would be paid by corporate customers is being scaled back in a way that's magnifying the woes of businesses big and small.

What's to be done?

Well, in France, a new system is being implemented whereby taxpayers are sharing the insurance risk with private-sector insurers on supplies to viable companies.

And I would expect the Business Department and the Treasury to implement a similar system of co-insurance by taxpayers.

But that can only be a short-term solution.

In the longer term, the supply of finance to small and medium-size businesses has to be overhauled, so that the viability of those businesses is no longer dependent on insurance that's only available when the sun is shining.

Comments

Page 1 of 3

  • Comment number 1.

    The problem is the abuse of the supply chain by big business, particularly in a a downturn.

  • Comment number 2.

    The French scheme may well be adopted in the UK. However, the scale of business failures this year will be at such a level that it is likely that the insurance companies will leave the market completely.

  • Comment number 3.

    An interesting blog indeed Mr Peston.

    Insurance is only as good as the Insurer... Insurers need to have clear models of risk...and we should see that these are in the Public Domain. Same could be said for the banks' models really.

    But the reality is that these institutions hide behind Proprietary Licence as a reason for not putting their models in the public domain. I would suggest Public airing, Public discussion...everything in the open. It would make for a world in which such models can be challenged and amended. And audited too.

    For example : I tried a few times to have the RBS publish their risk/valuation 'mark-to-model ' models for CDOs and other instruments. The excuse was always the same...'our' models are not in-House but imported into RBS under licence. Under the licence agreements we cannot put such models into the Public Domain.

    How robust were such models we cannot tell by scrutiny of the models themselves. What delights of higher mathematics they entail we cannot tell. SECRECY, SECRECY, SECRECY...
    overpaid Maths DPhil Boffins working goodness-knows where, blinding Risk Management Committees with spectacular symbols written down in a way to stultify even the most savvy City Gent.



    If the difficulty of defining 'risk' is hard enough for the Financial Services Industry to manage, how would Gov't fare any better ? By picking up blank cheques to sign?

    If risk cannot be defined adequately THEN how in the Heaven's name can it be costed ?

    The appetite and ability for risk assessment in many parts of commerce and finance is already diminished. That is a structural problem . I see no signs of public debate on this issue at all.

  • Comment number 4.

    So UK trade credit insurance is geared 1000:1, useful factoid. I had wondered about that. Are they running exchange risk too? Did they put the premiums into asset-backed paper?

    I would imagine with gearing an order of magnitude higher than forex, any sudden jolt might cause a sudden shortage of capital. And they would like some. From us. Because we need them so much. Yes?

    We are in fact, being asked to pick up the costs of corporate insolvencies (of which there will be many) and make the creditors whole (costing some small percentage of £334bn per year by the looks of it).

    Robert, we are getting tired of hearing this.

    Co-insurance of food and medical supplies - OK. We are going to need that.

    The rest - NO. You expect us to underwrite the insurance on plastic cutlery?!

    I have a suggestion for lenders and insurers everywhere. How about you charge what the risk really costs? Tomorrow. Cover your costs in the price of your services. How long do you expect to get away with keeping your costs secret and billing them to the taxpayer?

    I have a suggestion for traders. If you want the goods, deal with the suppliers. If you do not, you will be volunteering yourself for a Zavvi, which lost theirs. Capacity has to be cut somewhere, and you will be doing someone serious about staying in business a favour.

  • Comment number 5.

    I forgot to add, how about enforcement of invoice payment terms? Auditors signing off on accounts where suppliers are routinely being paid several weeks late are validating the practice in their professional capacity, are they not? Is the FSA OK with this?

  • Comment number 6.

    Trade insurers withdraw credit limit protection from risky highly indebted companies (eg Woolworths) for good reasons. It seems to me that Gordon Brown is going to lose us taxpayers a few more hundred billion pounds when these companies it guarantess loans for fail due to consumers not being able or willing to borrow any more for purchases.

    When will people understand that this crisis is due to consumers and businesses being maxed out in their debts that they could not afford to borrow and spend any more? Gordon Brown's destructive illusionary debt fueled growth reached its peak and plaeau.

    Thanks to Labour high borrow and spend policies, the now VERY painful market correction of deflation and depression has to be allowed to happen.

    The alternative that Gordon Brown is pursuing of money printing and encouragement of further debt instead of saving will only lead to hyperinflation and complete monetary collapse together with the end of our civilisation.

    We need to create wealth by saving and not to destroy it by allowing printed money and reduced interest rates to create hyperinflation.

    Money in bank accounts is not money wasted since the banks lend it for investment growth purposes to those they believe CAN repay it back. Replacing savers money for government loans to the banks that itself is borrowed or printed will just make things worse.

  • Comment number 7.

    Umm, I hope this doesn't seem too crazy or radical or anything but -

    Why is everything being done on credit? What happened to companies actually, you know, buying their stock and selling it on for a profit?

    Why is debt involved in this equation as a routine part of business rather than a last resort?

    Then there wouldn't be the need for insurers like this, except in difficult circumstances.

    It amazes me to find out exactly how much of everything is run on debt, and how much that must push up the prices of goods and push down on the profit of the retailer.

  • Comment number 8.

    #3:

    Every time I encounter a reference to proprietary models, I remember Madoff using them as a shield. Assuming the worst is easier and saves time compared to really thinking about it. It might not be fair, but hey - trust is a crazy beautiful thing, never about fairness.

  • Comment number 9.

    The real change that sadly needs to come is a change in the political system. We the public are stupid and greedy, and though we know booms and busts are historical part and parcel of market economies, any hint of Crash Gordon burning more money with VAT giveaways and the like, and his opinion polling shoots up.

    There is a vested interest for any GB political party to throw money away in its 4th or 5th year, and the great Nu-Labour giveaway has coincided with the death throes of Crash's government.

    We are not entitled as the british populace of 2009 to spend even more money which belongs to the workers of 2011, 2012, and beyond. That is exactly what Crash has been doing by raising the debt.

    The spectre of Malthus has not been raised over GB, but humans, as a species, are prone like all others to overpopulate, overbreed, until pestilence, disease, wars and death provide natural checks and balances to us. Our bodies tell us we are hungrier than we really are, to encourage more food to be eaten (as a store for when there isn't food for the day). We always want more - more goods, more services, more consumption, less working hours, less work. We as a species are heavily flawed.

    The political cycle needs to be scrapped, because it is an utter disaster for GB to have a dying government throwing away cash which belongs to future taxpayers, and ironically according to the polls, actually receiving better polling as a result.

    Any sensible party won't be elected. The government of every day and age has a perverse incentive to inflate bubbles, and stay in power for extended terms. (nu-labour, 12 years and counting). If the country had been run in our own interest, this bubble would never have happened. Instead blind-eye mania won the day.

    Its all so damaging, and so sad, and I cannot believe we are so crazy as to actually tell pollsters how keen we are all of a sudden on Crash Gordon now that he is burning money on VAT giveaways etcetera. The government already has a massive hole in its books, and losing another £12.5 billion is just financial lunacy.

    The housing market has to be allowed to fall back to its long term trend of house prices being 3.5 times income. The more delays and giveaways to keep people in homes they couldn't afford, the longer this recession will go on for.


    As for Robert Peston's latest piece, what seems clear is that (a) the models for calculating risk aren't very good, otherwise (b) insurance companies would still be quoting fair prices for insurance. The problem is that the risk of default is high, so the premium they have to charge is high. Instead what seems to have been going on is that insurance companies have been cherrypicking virtually zero-risks, and just taking the money from that. The fact is there is a fair market price out there for every single company/product, and it will add on a massive cost to all businesses in these recessionary times to pay for it.

    Gone are the days of ultra cheap insurance, if you want it you have to pay for it, and its going to be very, very expensive. The main article itself suggest a return to nice cuddly ultra tiny slivery cost insurance, which is impossible.

  • Comment number 10.

    #7 (Gothnet) - I can provide a partial answer. It's a combination of two factors.

    One is the extension of payment terms which #1 (glanafon) refers to - retailers reduce their capital requirements by paying their suppliers later.

    This combines with an unfortunate phenomenon which is intrinsic to all insurance markets - called "adverse selection". I have written an explanation of it at the following address:

    http://www.knowingandmaking.com/2009/01/credit-insurance-trap-for-uk-retailers.html

    There are two paths from here. One is to let lots of retailers collapse with all the knock-on effects that will have. The other is more radical but could work a lot better - details in the article linked above.

  • Comment number 11.

    How did we come to be a culture (on both sides of the pond) where businesses believe they have the divine right to conduct business without risk? 'Profits are for us, risk is for the other poor schlubs in the transaction!'

    The corollary idea is the idea of the divine right of management to profit, at any cost to investors, customers, employees, the general welfare.

    I have lost count of the number of 'executives' in my industry who have made a life's work of placing themselves into the stream of cash associated with the creation and delivery of the product, skimming a bit at every turn, coming and going. It became so common that we became innured to it, like the wallpaper in the hallway.

    Of course, now that that particular industry has shrunk by about 1/2 to 2/3's...well, we're noticing that no one sells insurance to those exposed to that particular risk.

  • Comment number 12.

    Has anyone noticed the Government are gradually taking over running everything, bit by bit. Has new Labour become old Labour by the back door? Did Flash engineer all this or just an opportunist who is seizing the moment?

    At a time when just about everyone is trying to reduce their debt the government are borrowing ever more to buy into anything that will eventually turn the UK into a communist state.

    Of course it is being done in the name of ensuring we keep our jobs, homes and prosperity. Where really HMG are bit by bit getting our houses, they are creating our jobs and the prosperity is only an illusion anyway.

    If you now re-examine what Flash has been doing you may discover a logic to all his madness and maybe he is not so mad after all.

    So instead of trying to second guess when the election will be you should consider when the emergency powers will be invoked to suspend Parliament in the name of preventing the complete collapse of the UK.

  • Comment number 13.

    Is this type of insurance something new? In 30 years of running businesses in the UK I don't recall anyone asking for it from me. No-one had the cheek to ask, perhaps, knowing what my answer would be?

  • Comment number 14.

    I am involved in credit insurance in two forms in that firstly many of my suppliers credit insure their debt for supplies to me until their invoices are paid.
    The credit insurance level a business can justify depends on several factors such as how long the company has traded, is there any negative financial information such as CCJ`s registered against it, but mainly on the strength of its trading accounts/balance sheet.
    Therefore a trading company may likened to a cake because only so many slices of `credit` can be justified depending on the last financial set of accounts filed at companies house.
    Secondly, I in turn insure most of my customer base in case they fail in business and then I can claim 90% or therebouts if the conditions of trading are met.
    The levels of credit per customer/company are decided by the same underwriters who failed to predict the country called Iceland was in serious financial difficulties mm....?

    My solution would be to issue a mandatory credit period for all business of say, 30 days from date of invoice instead of the crazy amounts of credit that are floating around the commercial operations which really amount to unsecured long term loans, don`t they?

  • Comment number 15.

    At 01:13am on 12 Jan 2009, Amused2Death wrote lot of Common Sense, with the crux of the matter being that to have discussions, transparent and open and in the Public Domain, rather than behind closed doors as if in Conspiracy Mode to Continue Conning the Public and keeping from them the Truth of what it being discussed,[and was not Chequers hosting such a gathering this weekend] will allow for a global consensus in Knowledge to prevail rather than a band of right dodgy fellows issuing a statement which one is fully expected to follow/accept.

    The problem in such arrogant pronouncements is that the reasoning for the words shared is not shared and therefore the underlying motives and hidden agendas, which are sought to be maintained and which are the cause of all the calamities, are invariably still present, draining the System of its Vitality to feed a Parasitic Core in Terminal Decline.

    Someone else once said .."It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." -- Henry Ford .....and for Governments not to change the System rather than jumping into its revolving bed like some impressionable star-struck groupie to be used and abused and thrown out after a short time, to make way for another wannabe Fooled Again by a Star-Struck Fool, makes them complicit and guilty in the first degree to the Charge of Conspiracy, as Active Accessories condoning/concealing deeds, which would induce and produce Popular and therefore Lawful Revolution .... which might also be considered as the Conspirators holding up Evolution for their Pound of Flesh, and Feather Nest Advantage in Monetary Profit and Gain. It is however a Game which they have Played which has now been Hacked/Cracked, and the Code which is broken will Guarantee Increasing Rapid [Exponential] Catastrophic Meltdown in the Systems which would try to retain and maintain it for the Obscene Benefits which its Heads Enjoy for Nothing, rather than Fix it with a Completely New System, which obviously will be Bought In by the Failing System,if they would wish to still have a Modicum of Input to ITs Beta Open and Transparent Workings.

    Explaing how the System works in easy, and when it is corrupted to Server a Gaggle of Gannets rather Golden Egg Laying Geese, are the Gannets hopelessly exposed and easy Prey to be Simply Popularly Replaced with Universal Support for a Complete and Radical Change, Guaranteeing their Demise and Re-Energising and ReCapitalising the Intellectual Property Industry/Financial Sector/Dream Factory.

    The SMART Banker/Politician [and some may consider that an Oxymoron], buys in New Codes and Systems Programs to Replace the Hacked and Cracked Program for a New American Century.

    The Enemy is within and thinks to Run the System and Humanity for itself. However, the Times have AI Changed and the Natives are more than just Restless, for they have been Stealthily Active and now they have the Keys to the Locks on the Vaults and they can bring the whole Ponzi Edifice Crashing down, burying all who would step forward to Champion and/or Defend its Corruption and Perversion.

    This is an interesting short read which throws light on the problems which no one is addressing but which are the Root and Branch Cause of the Disease which Plagues and will Quickly now Destroys the Self Service Sectors of Governments and Bankers and the Business of Quaint Religion ......http://www.jesus-is-savior.com/Evils%20in%20Government/Federal%20Reserve%20Scam/quotes_on_the_federal_reserve.htm .... all of which doctor Reality to brainwash the Impressionable with an Old View. But whenever you realise that we are so easily Programmed by what we are told and shown, and what we are told and shown to believe in the future is so easily redesigned to educate and instruct a corrupt and perverse "leadership" to fund and invest in a New World Order System v2.0 ..... with IT building it Transparently in Virtual Space and Cloud Layers so that it is always available to All in Power and Control Systems and also IT has it Secured from Abuse with its Higher Cloud Control Layers being Accessed via Virtual Competence and with Assuring Transparency also delivering the Insurance Element to AIRevisionary ProgramMIng.

    And if it is not Provided by any of the the Present Establishment Incumbents then they will have proved their Worthlessness and will be summarily dismissed as being a Destructive Selfish Irrelevance and Unacceptable Future Burden on Humanity and Society, which they should be rebuilding with the Flow of Wealth Streams rather than them Banking them for, as we have seen personal paper fortunes, easily lost with the leaking of cracked codes/dodgy deals/crooked capers.

    Clean Up your Acts and Deliver Wealth to Society Builders/AIdDream Makers, and the World and his Dog will beat a Path to your door, for the Keys which Unlock the Passion.

    cc .... Dear Darling, Prudence ...Re the Grant of HyperRadioProActive Funding Streams and XSSXXXX Code Instruction for Binary Manipulation of Human Perception.

    Robert[Peston], with everyone and anyone who may be able and enabled to distribute multi-million pound funds, hiding away in the dark shadows with no obvious means of direct communication, [which you will have to concede is probably by arrogant dumb design] perhaps you could advise on who one targets and puts on the spot for it is not the case that money is not freely available, for we are constantly being told that billions of notes are, and they have been so invented to be so available, so who decides who is worthy of patronage and favour of an invented from thin air commodity, for I will have no problem in spending a not inconsiderable sum more than just wisely but also to greater benefit in a Neureal World Order Program which Allows AI and ITs Good Beta Governance to Deliver Needs and Feeds/Prosperity and Comfort to All, Virtually from CyberSpace.

    And would anyone care to Put a Realistic Price Tag on that Facility/Faculty, or would seven sevens for C42 Quantum Control Systems Technology be a very Reasonable Initiating Deposit/Credit on Current Working Account?

    Ps ...As SurReal and Unlikely as the above may be, one would be doing oneself a grave disservice to Not Imagine/Not Think that it is a Real and Viable and Valid Proposal to the System and its Petty Cash Controllers.

    And just to give some added emphasis to that assertion, you can be assured that this blog entry/Transparent Thought Submission will also be sent directly to HMGCC although sadly, and it is hard not to be cynical and say how bloody typical of the scared rat caught in the honey trap, not its Sub-Prime Ministerial No 10 Channel ....

    "Email Number 10

    We have decided at this time that it is important to take another look at the E-mail Number 10 service to ensure that it meets the same high standards as the other content and communication measures that the website delivers.

    Unfortunately, this means that we will be unable to replace the service as quickly as we had hoped, but we aim to have it up and running as soon as possible. Please accept our apologies for any inconvenience caused." .... http://www.number10.gov.uk/footer/contact-us

    Will someone please tell Labour to stop digging their Hole and start Thinking afresh with New Thinkers and HyperRadioProActive Tinkerers/Fine Tuners on Board and Leading in their Fields.

    What is there to Lose other than Entrenched and Entrenching Ignorance?

    And all of that is a True Story for the BBC to Follow and dDevelop if they had any Real Creative Direction from the Top or from anywhere within, for of course, it can easily be subverted to Server any Cause dictated to it from Department Heads with its Generous Guaranteed Public Funding Streams.

  • Comment number 16.

    Dear Robert
    Do not talk to me about insurance
    I have just recieved from the Fianacial Ombudsman Service a settlement with my Bank, over "MISS SOLD personal protection insurance."
    The sum is £4700-00 over five years,
    In context this is yet another sub prime issue, as the cost could be horendus, to the finacial industry and especially Insurance Companies,who have yet to be xposed for their deals ion the money markets.
    The mind boggles at the cost of commercial insurance, "How sub prime is that"?

  • Comment number 17.

    #12
    It's not that HMG is taking over functions, it's that the functions are being dumped by those who should be doing them. We're headed in the direction where the banks will be charging the Treasury the earth for doing absolutely nothing. For myself, it's astounding watching what's been going on for the past few monthsm seeing the amount of grief the Treasury gives the Civil Service for their projects. Like the old King for a Year, the banks're living high on the hog before the rug's pulled.

  • Comment number 18.

    Hi Robert,

    Can you keep us posted on progress of the Banking Bill please?

    Specifically, the Government's proposal to remove the clause in the law that requires the BoE to publish its weekly balance sheet?

    This is important, since it means that the Government could simply print more money (as euphemisms go, "quantitative easing" is right up there) and we would not need to be informed by law.

    I cannot for the life of me think of a practical motivation for doing away with this legal requirement of the BoE, which obviously means that suspicion is all that remains.

    See you in the pub.

  • Comment number 19.

    Let's rewrite the rules and ban this form of insurance, making banks bear the risk of loans. No more laying-off risks.

  • Comment number 20.

    The pre-payment point is even more significant than the insurance issue: pre-payment is starting to be demanded in areas where trade credit insurance does not feature at all. This will change the very structure of trade and capital.

    In turn, both of these are just two of the painful outworkings of a drawn-out collapse: the dominos fall much more slowly than most people imagine.

    It's hard to see a way out for Brown, other than a snap election before yet more of the inevitable pain is felt.

  • Comment number 21.

    Is this why loans are repackaged and sold on? Insurance will be required even more in the current climate.

    There are several bubbles occurring at the same time such as levels of spending, borrowing / credit, investing, speculation, risk, property.
    Is there any correlation for the same businesses and individuals for causing more than one bubble at the same time

    e.g. the person who spends too much, borrows too much, then invests and takes risk to recover the money and has a big mortgage

    Nobody know the full levels of borrowing occurred with other institutions e.g. Someone can have a Bank Overdraft, 3 separate loans, 10 credit cards, and apply for 3 more loans with different companies at the same time

  • Comment number 22.

    And the price which HMG will ask for the premium?
    If as usual this is a hint from Robs' mate Alistair then presumably the figure will be significantly higher than the 0.1% rate implied as being the current 'market' rate.

    A nice little earner to replace some of the lost city tax revenue?

    This system however as it is to be implemented in France relies on there being a maximum credit period of 45 days which is being introduced (intra country) at the same time.
    This reduces the risks associated with covering credit for the ludicrous terms imposed by many corporate behemoths on smaller suppliers (90, 100,120 days).

    Unless this generally positive move is clearly defined and a clear maximum credit period defined in law (45 days?), then all that will happen is the private insurers will retain on unsubsidied lower terms the negligible risk business and all the unknown/high risk business will be underwritten by this arrangement with their customers pushing for longer terms ("well you can get cover now so you can get more money from your bank can't you, so just extend the terms another x days - i.e. more working capital provided to larger business by SMEs for free).

    A simplistic view would be to permit a company only to obtain credit to the same term as they provide to their customers.
    3-4 months to pay your weekly shopping bill anyone?

  • Comment number 23.

    #7
    Yes, the pervasiveness of debt financing is impressive, also the refusal of any large organisation to actuually take any risk, or to assess risks themselves - every risk must be insured, credit rated, underwritten, laid off somewhere else etc. Until a few months ago, I had naively imagined that business was about taking and managing risks.

  • Comment number 24.


    #15. amanfromMars

    'I for one' thought I recognised the distinct writing style, it was confirmed by going back up to see who posted it, your insights may prove to be most useful.

  • Comment number 25.

    The more you borrow the higher your credit rating.

    Borrowing money to invest in shares is a bad idea.

  • Comment number 26.

    The problem with mandatory payment periods is that these would only apply within the UK - therefore it would put exporters at a disadvantage as they would have a mechanism under which they would be forced to pay within 30 days without a guarantee of receipt of funds.

    Secondly if this caused exporters a problem then one answer may be to start buying from abroad (depends on how legislation is worded) which again would disadvantage the UK.

    Remember that whilst the exchange rates are currently in favour of exporters this may not continue forever and unfortunately if legislation like this was brought in it is unlikely to be revisited when the exchange equation turns against us.

    Exporters have suffered for the last few years due to exchange rates making us uncompetitive against the US and the competitivie advantage we now have should not be hindered but encouraged and invested in.

  • Comment number 27.


    #13 I'm with you on this - surely when you run a small business and extend credit to customers you expect that a small percentage, for whatever reason, will be unable to pay at some point. This is a normal part of being in business - the proprietor expects to take the risk, not some faceless organisation / insurance company who will no doubt find some way in their small print of not paying when push comes to shove and the customer defaults.

    Bob's got a point about credit insurance generally - it could prove to be the next time bomb waiting to implode.

    Time to return to a simpler economic model which excludes the parasitic insurance industry.

  • Comment number 28.

    Re credit insurance itself - just another 'fear' insurance - typical of insurance that when its needed its being withdrawn - just like banks - give you an umbrella when the sun is out but once the grey clouds start gathering they take it back.

    If the premium v risk ratio is correct in the article then its just another clear sign of incompetence within our financial bodies where people have based a model on boom forever - whilst I don't really think any political party is going to get us out of this with a magic wand I wonder if GB is not liable in some way personally for all the erroneous business models based on boom forever - surely he has made numerous quotes in the past about 'no more boom and bust' that would mean business leaders could argue they had run their businesses based on his 'guidance'???

  • Comment number 29.

    #11
    If it weren't for the taxman, the system would be a zero-sum game at worst. For that reason, there's no need to gross-up the risk by not laying off the risks to each side against each other at arm's length, it oils the system and kept bankers in employment, as long as they remained honest. Now that's broken down, it becomes a negative-sum game because they introduce another level of risk into the model.
    People like Neil Record (who first introduced me to AC) circumvent the system by cutting the banks out of the system. It is to be encouraged.

  • Comment number 30.

    ... and people wonder why we dislike insurance companies.

    Insurance you can only get when there's no danger of making a claim? Ridiculous!

    Sort of like borrowing facilities that are only extended to people who don't need the money!

  • Comment number 31.

    So in France (as here soon) the public are not only responsible for lending the money (replacing banks) but also insuring against losses (insurance co)?

    If the same happens here, why don't we just build the thing ourselves too and do away with all banking and business?!

    This really has gone too far now. Banks have failed. Fully nationalise them, sell off assets and build a better, smaller system!

    The strong businesses will survive, some weaker ones will too (with help from "fairer" banks) and the weak ones will fail. As it should be.

  • Comment number 32.

    Yet another story detailing how we will have to bail out the financial system because the model they are working to is broken.

    Take this story: Bank Bosses Discuss Mortgage Plan http://news.bbc.co.uk/1/hi/business/7823132.stm

    Here, the Government are set to step in and guarantee mortgage lending, even though it was their own broken model that bankrupt the economy. So they intend to re-invent the crisis by attempting to prop up the housing market. However, this isn't because they personally care about the average homeowner; no, it's because they don't have another plan, and will do anything (at any cost) to keep themselves in power.

    So what does this say? To me it says, "be feckless, borrow beyond your means, and don't worry because you're buying into a one-way deal underpinned by Government policy". As far as the Government is concerned the only way is up for house prices – resistance is futile.

    I just feel for all those careful people that waited for the natural course of market forces to take place, it seems like there is no place for them in our economy. Just like a casino this is a rigged game, in favour of the house – the Government.

  • Comment number 33.

    This is precisely what I have been warning our directors about: credit insurance is only as good as the ability of the insurer to pay up.

    Years ago when I ran customer service operations we never had credit insurance. We used our commercial acumen: usually pretty good. New customers who did not understand could get a bit bolshie over being asked to pay up front but that was the way of the world.

    I never quite understood why commercial credit insurance became so common but the risk now has reversed: because the customer's credit is insured there is less reason for the selling company to keep a proper eye on the condition of their sales ledger.

    Perhaps there are more risks being taken because of trade insurance?

  • Comment number 34.

    The growth in Trade Credit Insurance and it related Invoice Discounting are essentially about providing liquidity to business that have insufficient funds in working capital to fund their trading activities.

    In the last decade many private equity investors and other realised that by extracting the working capital from companies and forcing them to rely on insurance and discounting they could make money. This has happened widely in medium sized businesses. (It happened in all of the downturns that I have seen.)

    Now, this works fine in an expanding economy, but come a recession or in fact a downturn of any sort and even worse a general drying up of liquidity, the whole process collapses. This leaves the private equity 'investors' (asset strippers) with a large profit and no responsibility to provide equity funding to the companies they have asset stripped to replace the working capital that the companies used to have.

    So now the government is having rescue the companies that have been asset stripped, but the asset strippers get away with the loot - just like the bankers. However I do not see much alternative - but I do think that those who got the companies and bushinesses into this situation (being without working capital) should not be allowed to get away with it!

    I am however coming round to the idea that letting bankruptcy take its course will be better for all of us! (now that we own 43 % of Lloyds and 58% of RBS!)

  • Comment number 35.

    There is a major retailer active today. Set up a long time ago. Innovators in their own way in the early days. Still boast about stuff done in the early 20th century, although nothing to do with anybody working there now.

    Originally tremendous intergity. Paid suppliers on the nail. My word is my bond etc. Gave the customer a good deal. Also known for innovation in worker welfare. That business today bears no resemble to the original even though it still trades on the reputation of the original.

    They have sucumbed to the modern accountancy model of exploiting the supply chain, stripping capital to prop up profit and share value, effectively asset stripping whenever possible. You can only do it once and then the system is bare but there is no incentive to put capital back into the operation, you have to run on empty from then on. To put capital back in damages profit.

    In bad times they can only exist by the supply chain involuntarily supplying further capital. They would deny it but that is the truth. They pay when they feel like it, or in really bad times when their bank allows them to issue a cheque. The idea payment can be only weeks late in a downturn is laughable. They are not unusual. That is the central problem, this insurance mechanism is only a tool to try to hide the problem. That is now a common behaviour. Failing business models leaning on anybody and anything they can.

    Business has ultimately to be based on trust, the idea a insurance policy will save you is quite wrong. The minute you enter delays in cashflow and a potential litigation or a potential insurance claim enters the scenario you are in trouble. Trust has gone.

    The system is deliberately stretched - by people who add no value - to the point no where there is no safety factor. It is totally wrong to suggest somehow in the text that Woolworths was somehow a victim because of insurance availability. Woolworths failed because it did not have a sound business model. People did not want to buy there in sufficient numbers. Woolworths ultimately pushed their suppliers to the point something had to give.

    Personally having dealt with this beast and others like it in the past there is no way I would want to deal with it again or recommend anybody else deals with it. We do something more rewarding. The only sane thing to be as a supplier how ever big or small is not to supply this sort of entity.

    Effectively that is what the UK public and the body corporate are demanding though they do not realise it. The cessession of trade. Anybody who believes insurance is a remedy for a lack of trust is quite frankly mad.

  • Comment number 36.

    well... its all coming out of the woodwork now.

    I wonder what will be the next shining example of British world leading excellence in business and finance.

    How many more UK economy coffin nails can we take and still have people here say it is all due to Roberts doom and gloom?

  • Comment number 37.

    Isn't this just another case of the bank's trying to absolve themselves of any responsibility?

  • Comment number 38.

    I wondered how long this would take to rear it's ugly head.

    Dig a little deeper-insurance companies have their underwriters telling them what is acceptable risk.

    Credit insurance has been contracting for sine months. Funny how it takes the failure of a big retailer to bring it to the fore!

    Removal of this forces companies to ask for upfront payment. Again, this impacts on cash flow.

    Cash has, and always will be king.

    Trouble is, even those companies with cash reserves will see these depleting rapidly.

    And what of massive companies forcing payment terms of 90 days plus settlement discount.

    This practice should be outlawed.

    If a company's terms and conditions state 30 days and a customer accepts these (even tacitly by buying the goods in the first place) then they should settle in this time. End of story.

    The only discount offered should be early settlement discount offered by the supplier.

    How dare these big companies think they can dictate terms when they are a customer!

    If all bills were settled in 30 days, there would be no need to insure debts!

  • Comment number 39.

    Possibly off thread, but looking at the minute fraction of the Llouds & HBOS rights issues subscribed to by current shareholders, isn't this a truly devastating vote of no confidence in the merger, worthy of a blog of its own?

  • Comment number 40.

    There is some confusion nearly everywhere regarding risk and the pricing of risk or risk premium.

    What most commentators and correspondents refer to as the risk is actually the crystallisation of the event.

    Risk is a function of the impact and probability of an event, whether positive or negative. i.e. if an event is very likely and its impact is high then the risk is great and the risk premium should be high. Essentially, there are four quadrants each showing degree within them, viz:
    1 high impact and high probability, the worst case if negative the best case if positive.
    2 high impact low probability, could be the black swan but hurts badly when it occurs.
    3 low impact high probability the regular minor niggles if you like
    4 low impact low probability the best and least painful.

    The management decision whether to pursue a course of action should examine the business objectives (control objectives in another sense) and put mitigating controls in place, one of which could be trade insurance. Doing nothing is an option as it can increase reward. So is hedging, reducing the downside at the potential cost of reducing the reward.

    The mitigation/insurance should be calculated after careful analysis of the above.

    Unfortunately pricing has ignored/forgotten the four tenets and in the race for profit, the premiums had fallen. What we are seeing is a correction, in the form of market withdrawal, which will result in raised premiums in a free market or artificially low levels in a controlled market. The artificially low levels will of course result in greater losses to be paid for by the usual fallguys, us taxpayers.

  • Comment number 41.

    It strikes me that much of the structure upon which our prosperity, health and welfare depends is inherently unstable.

    Aircraft design varies between civil craft and military craft. The wings of a passenger jet are angled upwards. That way, should the plane bank, the pressure under the lower wing will be greater, as it's nearer to horizontal. This tends to right the plane. A fighter, by contrast, will have wings angled down. A change in banking angle increases pressure under the outside wing, pushing the aircraft to bank further.

    Many of the models we run are like that second craft: any feedback on instability will tend to make them less stable. It doesn't take much for the market to flip on its back. We have (had?) the equivalent of that Eurofighter, where the controls were so sensitive, you needed a bank of computers to continually and continuously adjust parameters or it would tear itself apart. And THIS is what we relied upon to keep us from poverty, disease, homelessness and death.

    We need a system with closed loop feedback, where the failure of the system would enact parameters to encourage its success, not where the key factor in the success of the model is our confidence in its ability to succeed. We need a steam-engine governor, not a flip-flop switch.

  • Comment number 42.

    I find the psychology of the current financial troubles rather interesting. There was me thinking that insurers were calculated risk-takers and that we lived in broadly pessimistic times (compared with the post-war optimism of the 50's and 60's). Now I am gradually realising that I was surrounded by wild optimism and that I may have to re-style myself as a relative realist. Perhaps optimism and money don't mix.

    What do amateur economists think of the idea of a 'Bank of Ideas'? http://thedailycrazy.wordpress.com - with less money around I think we should look at banking and lending other things....

  • Comment number 43.

    Let the debt ridden companies fail and allow their competitors to take them over! Why does this government insist on helping the stupid?

  • Comment number 44.

    Insurance works only for risks which are independent and which can be pooled - insure the lives of 1000 people from across the country and there's a very good chance that, say, 5 will die each year. From the insurance providers point of view, the risk is stable (even though it isn't from the point of view of one of the lives insured).

    Trade credit insurance, though... and similarly insurance taken on corporate bonds to protect against default... is trying to protect against risks which aren't independent. If a recession starts, every company struggles and the insurance company has to pay out on every policy... and it simply goes bust. So the insurance is, in fact, worthless... and the sooner investors realise this, the sooner we can put these useless products behind us and get back to responsible underwriting.

  • Comment number 45.

    12,

    I posted as much a long time ago, I also coined the phrase ‘Socialism by stealth’ ;-)

  • Comment number 46.

    43
    Silly question, the government is helping themselves; the congenitally stupid.

  • Comment number 47.

    The petition originated by Alex Wallace asking for GB to resign has attracted 907 signatures so far. The petition runs out on 15th Jan 2009. Get cracking and add your name to the list, - now. Let's show them what the majority think of this aweful bloke and excuse for a government.

  • Comment number 48.

    Someone told me recently that the credit card companies would probably start to foreclose on their loans to help make up their shortfall, and that this could happen within this financial quarter.

    Can anyone substantiate this, please?

  • Comment number 49.

    I still find myself wondering more about the insurance the insuring company has taken out against its own possible failure via, I presume, Credit Default Swaps.

    As Robert Peston says, to charge a few hundred million for hundreds of billions of cover can't make sense. But equally to have hundreds of per cent more coverage via CDS than there is real money to cover that potential debt equally seems crazy.

    As ever I complain that so far as I can see we are no nearer to understanding why nobody saw these problems coming and why in the future we will succeed where we failed so dismally this time.

    Confidence won't return in my world until there is credible reason to think the problems have all been identified and issues like regulation, credit risk analysis and the instruments used are all fully resolved.

    The VAT stimulus and Labour spin only delays real recovery in my world.

    At least Obama is coming.

  • Comment number 50.

    You can find the petition here,

    http://petitions.number10.gov.uk/Fianance/


    Just look for the correct petition by Alex Wallace ending on 15th Jan.

  • Comment number 51.

    The Business models are not broken they are about 90% correct and need to be fixed to stop people exploiting loopholes.

  • Comment number 52.

    On the subject of insurance, I have just read about the 20% cut in Friends Provident's with profit fund, which I shall be drawing in October of this year. Just how long are we going to be conned by one government after another concerning private pensions?

    If you had have paid in £50 per month for the last 25 years you will now recieve £29,000 instead of £34,000 that you would have recieved last year.

    I have looked at annuities, and for a 65 year-old male a RPI annuity without a five year guaranty, which is as close to the terms of a state pension as I can find, will get about £1300 a year pension - assuming annuity rates don't fall with the base rate. This is less than the extra a 65 year-old can get in a state pension, if they do not have a private pension and less than £6,000 in savings.

    What a bloody waste of investment!

  • Comment number 53.

    Most small businesses that I have worked in never insured against customer payment failure. One knew the risk, (the word Ltd at the end of the company's name was a clue), and business was conducted on the basis of trust. (Isn't the City's motto "My word is my bond")
    Sure, one got burnt occasionally, but it was rare and I'm talking of experience over 40 years. It was possible to "factor" invoices but the cost was high, (min 3% of invoice value, not your 0.1%!) and the factoring companies, usually arms of a large bank, also wanted to cherry pick the type of invoice they would handle. Curiously enough, whenever we got burnt, it was with companies who had good bank refs and guess who was first in the creditors queue-the bank that had given the good reference.
    Business is a risk, so if you don't want the risk, don't join up!

  • Comment number 54.

    I see the red herring of legally enforced invoice payment has come up. Yes I agree that the mainland continental model of a fixed payment model is worthwhile. In fact due to the behaviour of businesses in the 90s it was quite heavily promoted, only to be left to whither as a concept by HMG who would have had to do something.

    It has some value in that it offers resistance to what can only be described as bad practice. However it is not a solution. A business effectively bankrupt (or more correctly just this side of bankruptcy because trading under those conditions if fraudulent) cannot pay. Its bank will not give value to cheques issued. Simple as that. You can even have the situation that the business goes intothe bank and negociates a issuing of cheques. Such cheques are then issued, and can even be 'cleared', which actually does not mean anything, only to then not be given value. You can even have discussion and tripartate agreement and go around the loop a couple of more times before the cheque is declared dead as a doornail.

    A man in debt will always lie, he has no option. Cant remember the source, somebody noteable, but it is apposite.

  • Comment number 55.

    Oh how Crash Gordon must still be rueing his decision not to have called for a general election in the autumn of 2007...that's when he well and truly BOTTLED IT.

    Now this man, with the deepest of flawed characters, can only think of the idea of spending his way out of a financial disaster...and in the process drown this country in a sea of debt whilst trashing the currency. A desperate policy of crash and burn that is simply an attempt to save his morally bankrupt party and his own pathetic personal legacy. The UK is heading for BANKRUPTCY.

    This man even had the bare faced cheek to write a book about COURAGE.

    http://www.guardian.co.uk/books/2007/may/26/featuresreviews.guardianreview6

    If he had just one iota of courage he would do the right thing and stand down (for the sake of the country)...but of course, so flawed is he...he will not do it... because it takes someone with real courage to admit when they are out of their depth and let somebody competant take-over.

  • Comment number 56.

    I haven't quite got my head round the high interest rates hyper inflation heading our way about end of 2009/early 2010 as described by many posters, not today but regularly over last few weeks.

    1) Why will this happen?
    2) If it is just because of our weak currency then will it affect prices of UK things eg locally produced food?
    3) If interest rates go up to try and control what will happen to house prices in these hyper inflationary times? Seems to me that if none of us have any money and interest rates are high and there's no credit then house prices are not likely to go up? But then again all other things will find it hard to go up too?
    4) If we can't afford to import things then does the UK have sufficient basic food production to survive? (so no more mangos but we'd still have apples for example, no more tea and coffee but we'd still have water, no more Danish bacon but we'd have UK bacon etc etc

    If someone could just briefly explain it would help me understand where we are heading (PS please don't post to tell me we're heading off a cliff into hell etc - I know this already!).

  • Comment number 57.

    Post 35 Glenafon there is much that is true in what you have said and i think I know of the entity to which you refer.

    The trouble with so many business models including the financial ones in particular has something to do I believe with software.

    Software has made things appear too easy, and there has been a sort of slavish obedience to it's parameters.

    Far too many businesses don't have any capital at all and rely on credit letters to finance their operations.

  • Comment number 58.

    This problem arises, as with credit default swaps, essentially through systemic abuse of the concept of insurance. Insurance does more than spread risk (it can do nothing to diminish it). The effect of pretending otherwise is one of the key tricks that has empowered duplicitous bankers and all the other other swindlers to enrich themselves by crashing the system.

  • Comment number 59.

    51 kikidread

    If it only works 90 percent it is not working. Are you 90 percent alive. : )

  • Comment number 60.

    "Let the debt ridden companies fail and allow their competitors to take them over! Why does this government insist on helping the stupid?" .... #43

    bodgitt,

    Because, and there is free choice in this, they either feel most comfortable captaining the stupid vessel fleet [aka being at one with] or are press-ganged into supporting it, which would have us hunting for the Shipping Agent/Puppet Muppet with such Toxic Waste/Explosive Ammunition/Sub-Prime Cargoes for Sale and Sail/Import/Export with Negligent Discharge and Irresponsible Malicious AforeThought rocking their Boat.

    Neither of those two options display any notable or worthy Leadership qualities and the thread here is cordially invited to identify where they would see [Imagine, and it's true] the core problems being housed/preserved and protected.

  • Comment number 61.

    Not on the insurance track, BUT, can anyone comment that when the new superbank comes into being, if there is a branch of Lloyds and a branch of HSBC in the same town/street, as there is here, which one is likely to close?

  • Comment number 62.

    As someone who runs an SME I am very familiar with this issue and in my opinion it is a bigger problem than the banks pulling credit.
    Every business relies on non interest bearing debt for part of their working capital from their suppliers as they in turn give non interest bearing loans to their customers all this is the process of normal trading terms. In my case the credit I get from my suppliers is about 50% of the credit I give to my customers the balance being made up of working capital from the banks.
    To take away the credit given from suppliers just because some junior underwriter does not like your industry sector is causing the wjole process of trading to sieze up as the only alternative then is to pay cash in advance for raw materials, not a viable option for many companies.
    I could list on here many of the major companies in the UK on whom no trade insurance is available and you would be shocked.
    This would not cost the government a hundreth of the amount they are pumping into the banks to underwrite trade insurance and yet would have a far bigger effect on keeping industry going.

  • Comment number 63.

    It used to be the case that the state insured all export credit. It was a government department called the Export Credit Guarantee Department. There's no reason why it shouldn't be done again, and extended to domestic credit. What's so wrong about us, the people (through our elected servants, the government), helping ourselves (through our industries, in which we are all shareholders through pension and life insurance funds) to stay alive and successful?!

  • Comment number 64.

    My post at number 50 has been moderated. I was only telling you all where to find the petition for GB's resignation. You can find the info on RP's blogg - our banks have to lend more, post 198.

    Get signing

  • Comment number 65.

    Re CREDIT INSURANCE


    Its been more or less impossible since

    last september over 4 months ago.

    If you are prepared to pay the premium

    will the Insurer pay the CLAIM there

    are seriously SOLVENCY ISSUES HERE

    TOO.

  • Comment number 66.

    I think that some common sense is required here.

    Credit insurance is an annual policy and pays out on a claims made basis - once the year is up the insurance company offers terms (or not) for the next year.

    So yes the rate for credit insurance has been very low - reflecting the 'boom' times, however insurance companies will be altering their terms to cover the increased risk (and claw back losses)

    This is unlike CDO/CDS which are to all intents and purposes insurance contracts (which were 'underwritten' by organisations who did not have the resources to pay the claims if they occurred) - which have been written for a long period and do not have the flexibility to cope with changing market circumstances.

  • Comment number 67.

    Re 51: kikidread

    "The Business models are not broken they are about 90% correct and need to be fixed to stop people exploiting loopholes."

    I'm sorry but I have to disagree. How can an economy based on ever increasing house prices be a fully functional model? Furthermore in the world of software engineering it is often stated that "80% of the problem exist in 20% of the code", as such is 90% good enough?

  • Comment number 68.

    #12.
    When this government came to power in 1997, I believe that there wasnt a single member of the cabinet who, when at university, wasnt a member of the communist party.
    Not sure on the ratio today.

  • Comment number 69.

    @20

    yes the dominos are still falling but the banking one as not that many months to go now.

    @21

    I said back in oct 51% of all world banks assets are toxic. They just dont know yet.

    @34

    Yes banks should of been left to go bankrupt. All they have been doing is casing the problem. instead of getting in front of the problem. A bank fails, the goverment put in billions but then the bank still fails to do the jobs its meant to do. so what is the point? money should of been put into the better banks i.e. HSBC not only to cover the toxic debt it has but also to let it lend more. Germanys second biggest bank was nationlised a couple of days ago. a good few months after alot of the banks had failed. I think that 3 months ago that this banks assets looked rather better then, than a few days ago, in other words perfectly good assets are turning toxic.

    And before anyone replies i know that letting the banks fail would of made things seem very bad, but the goverment could of protected savers money. instead of protecting banks jobs. when it is very clear that these people are now being paid for nothing as the bank is unable to function proply.

    may i also remind people that many banks failed in the great depression and where allowed to.

    its my opinion thats all and i know some will disagree.






  • Comment number 70.

    er, hang on..

    let me get this straight. Banks won't lend to businesses that don't have insurance to cover the repayments of a loan. Where is the risk in that? On the applicants business. OK, not particularly ethical but hey, at least it means that the banks CAN lend money to those with insurance at nearly no risk so no problem from the banks side.

    So.... Why are we so obsessed with getting banks to lend to businesses when we should be pressurising insurers to insure so that the banks can lend.

    Alternatively, the banks can go back to the way it used to be... accurately assess the risks by performing a due assessment of the applicants income stream and business plan and actually lending them what they can afford to repay, rather than the riskiness of lending them what they want. Oh, and don't forget the use of collateral such as your house. The bulk of risk should be with the borrower, not the lender.

  • Comment number 71.

    59. At 10:23am on 12 Jan 2009, glanafon wrote:
    If it only works 90 percent it is not working. Are you 90 percent alive. : )
    +
    there's not a problem that we can't fix,
    we can do it in the mix

  • Comment number 72.

    I really do not think we need to be doing more scaremongering here.
    If the risk is too high the insurance companies will up the premium or reject it...whatever happens they will load the next premiums next time or for future customers....or they will say they were not provided with accurate info and not stump up....I do not think insurance companies need to be given any more ammo to raise their premiums .We do not want a run on insurance companies,do we ....Robert, you do not want that do you?
    Because something is theoretically possible it does not mean it WILL happen , and insurance companies know better than anyone how to manage risk....they put in so many clauses it is not worth having half the time.

  • Comment number 73.

    Some excellent comments on the risk issue. For my part the assessment of risk should not be a static single act no matter how clever the maths.

    One wonders if these professional organisations bother to carry out sensitivity analysis where the consequences of unexpected or even improbable events/changes are analysed and early warning factors are determined. I suspect such operational research models are rarely used.

    Had the government used such an approach on the level of corporate and personal credit in the economy it may have been able to spot the looming crisis earlier.

  • Comment number 74.

    Yet another thing that will have to change in the futrue....

    Any one yet bothered to look at what life will be like when we come out of the other side of this mess...

    How much borrowing will be available to businesses and how much for mortgages? What are sensible interest rates? How much can you expect to earn in the financial services industry? How much disposable income will there be? etc, etc, etc.......

    Because we seem to be spending an awful lot of money on the basis that everything will be as was –

    AND IT WON’T!!!!!

  • Comment number 75.

    can someone explain to me why suppliers are having to insure against customer payment failure ?

    Surely,
    a supplier should have to insure against his own failure to deliver.
    a customer should have to insure against his own failure to pay.
    The insurance would then be there to fulfill the obligations of each side of the contract.

    At it's simplest, no insurance is needed by either party, supplier has item in stock, customer pays c.o.c.
    More complex deals require milestones from the supplier and stage payments from the customer.

    I'm not sure as to why a widget supplier also has to be credit supplier and insurer (aren't there already established industries that provide these).

  • Comment number 76.

    Seems to me that a 0.1% premium is about right if the insurer can exclude new orders once he detects a recession coming.

    I can also understand why small companies were happy to pay such a small amount for worthless cover if their customers wanted them to.

    Obviously it would be stupid for taxpayers to give cover in a blanket way because the small business would just go bust with bigger (taxpayer guaranteed) debts.

    If cover becomes unaffordable then I cannot see why the person who benefits from the cover (the larger business) should not pay the premium.

  • Comment number 77.

    In 9 years of running a company I have never asked for or been asked for credit insurance.
    We would base our trade on local knowledge. In those years only 2 customers have failed to pay their invoice.

    Too many folk are obviously not capable of running a company, I suspect they all watched Wall Street and wanted to be Gordon Gecko.

    Companies by the look of it have had the life sucked out of them and lived on credit

    Those companies will have to be let to fall. It is not that hard to run a company well, so how these people failed is beyond me.

    Another thing I would do is enforce the law as regards to payment of invoice. The large companies take it as read despite the conditions of sale, to pay you after 2-3 months.

    Too many customers seem to think we are a bank that will allow them free credit for months on end.

    Maybe these companies are getting the business on the basis that they extend these lengthy credit terms, which again means its not worth doing.

    I'd sooner turn a contract down and have done on many occasions, If I think I won't get paid on time

  • Comment number 78.

    One further thought- how come Woolies needed credit insurance when it sold its goods for cash and bought on credit? Unless the stock was slow moving, surely it got paid well before it had to pay its suppliers? The same presumably applies to other retailers

  • Comment number 79.

    Moderator-please delete my post 78-its erroneous!

  • Comment number 80.

    Supporting credit insurance is probably a good thing but not strictly for the reasons that Robert suggests. Insuring against your customers going bust is a wise precaution, but the fact that it was completely mispriced shifted all the risk from small businesses to the insurers. You cannot blame the insurers for wanting to spread the risk or for asking for more money if the risks increase.

    All those small businesses could have continued to supply woolworths if they chose to without demanding up front payments. Nobody has to have insurance and the perception that you must have it changes depending on price and whether you are prepared to accept the risk. Were the insurance companies wrong to say the risks of woolworths failing were so high that credit insurance was withdrawn?

    I doubt whether artificially low government credit insurance would have done more than delay the inevitable at great tax payer costs in the case of woolworths, but the government may have a place in helping the situation. Sharing a limited amount of risks to allow businesses to adjust to the correctly priced insurance premiums makes sense. It allows price differentiation and gives a proper exit strategy and could be extended to help transportation trade credit guarantees.

    I still have no idea which are viable companies and accounting and auditing rules are tightened up so we have a clear picture then any packages aimed at the viable will no doubt end up distributed to the non viable, giving perverse incentives where the non viable but the viable out of business.

    The fact that Robert mentions this suggests decision makers are considering this and I can only hope it will be with a light touch spreading the risk and alleviating the worst of the premium rises, rather than heavy footed skewing the insurance market and continuing the gross mispricing of risk. At the end of the day a functional insurance market may be more important than any single individual company. The obvious question to ask is why don’t we get businesses to pay there debt within a month in which case a large portion of the problem disappears.

  • Comment number 81.

    Re 56

    Interest rates will rise because there is a lot of debt out there. The effect at present is that savings interest rates/mortgage rates are biased 1 to 2 percentage points above bank rate. GB is in debt more than other countries. Our currency is falling which will lead to inflation as we don't make anything any more (and interest rate rises to support the currency). If we go to the IMF for help, interest rates will rise again.

    House prices will probably fall another 10%
    and then stay at that level +/- 10% for ten years. Like they did in 1990. That much is good news as first time buyers have a fair chance of affording somewhere to live, renting or buying being equally sensible.

    Share prices will (broadly) rise as inflation kicks in.

  • Comment number 82.

    The basic of credit insurance are that a goods or service producer will sell their product to a buyer. The buyer will request a period of time after receiving the goods in order to arrange payment. The producer runs teh risk that during this period of time the buyer will default and the producer's balance sheet will have to record an impairment (affecting profitability also).

    A buyer will amost always request some form of credit period and market forces dictate that producers offering teh best longest/best credit terms will gain market share.

    The alternative is to ask for payment prior to receipt, which unless paying for groceries at teh till is not the way in which most business segments operate.

    This being the case, even small producers whose balance sheets were not large enough to run the risk of a buyer default (but nevertheless needed to offer credit terms in order to compete) would ask for either a bank guarantee from the buyer or purchase insurance against default from that particular buyer from an insurance company. As most buyers do not want to organize bank guarantees if they do not need to do this if buying from another producer, the insurance option became commonplace.

    This type of insurance is used at al levels of business, from small agricultural producers to multi-million ship and aeroplane manufacturers. The insurance companies offering this type of insurance run very sophisticated models and have made money pretty much every year for the last quarter century or so - thereofre it is not merely a question of their pricingmodels beiong wrong. Although the reality is a little more complex, the essence is that they decide how likely it is that a particular buyer will not pay a particular producer when their billis due. It is worth noting also that although at this point the insurer will replace the buyer's outstanding payment onthe balance sheet with the claim payment, the insurer has extensive means to continue pursuing this payment which is now owed to them - and they are often quite successful.

    Due to the sensitivinty of the models run by the credit insurance companies, as soon as they get a sniff that they could be writing loss making business, they can put a stop to it. There are annual contracts available but these tend to be prohibitively extensive.

    The issue is that if a credit insurer is not willing to underwrite the creidt provided to a certain buyer, then the producer must decide whether it is worth running that risk themselves. If not, then they will not sell to that buyer (Woolies). This is real market forces at work and, rightly or wrongly, should ensure that secure and well run/capitalised comapnies survive whilst less secure companies fail, thus preeventing the continuance of unstable companies which could lead to much bigger problems in teh future (the bubble scenario).

    Whether it is right for a government to underwrite the credit where an insurer will not do so depends on whether the current market conditions are so anomolous that even good companies are failing. This is for the "intellectuals" to debate but I doubt whether a one-size fits all approach would be appropriate.

    And for those who believe that the models should be public information - the majority of the data that the insurers use is in fact publicly available information. However they will spend a lot of money on interpretting hat information andcreating of proprietary software. To publish this information would be suicidal as any other would-be insurer will use the data and as they will have avoided all of the expense associated with creating the data, they will undercut teh original insurer substantially. This will not happen and I doubt that legislation in Europe would allow such companies to be forced to publish such data anyway. I think there needs to be some separation between the models used by producers in order to price their product correctly (pubs and jewelry shops and any other company will always have a pricing model) and the "models" used by finance houses to read the markets - they are completely separate processes but share the same nomenclature.

  • Comment number 83.

    Why not make trade credit insurance illegal? Then the banks cannot demand it and the taxpayer cannot be asked for it either. After all we have just given the banks armloads of money and if they don't lend it to someone they won't make any money on it. Oh and reduce the overnight Bank of England rate to 0.01% so any 'spare' money earns no interest.

  • Comment number 84.

    Re 74: thinkb4

    "Any one yet bothered to look at what life will be like when we come out of the other side of this mess..."

    I totally agree with your sentiment, where is the vision, what is that aspiration? How does the Government see the financial system operating in 2 years time? They buy into the banks and state that lending levels are to return to 2007 levels, then today, hidden at the boittom of the following report, it is stated that:

    http://news.bbc.co.uk/1/hi/business/7823132.stm

    "The BBC has learned that neither the banks nor the government are aiming for a return to the levels of lending seen in 2007 - described by a senior banker as "heady" - nor do they want to see a return to banks relying solely on the money they get in from savers. That would lead to a collapse in house prices."

    Their complete lack of consistancy resulted in the following petition:

    http://petitions.number10.gov.uk/LendingReform/

    It's about time the Government started to think strategically rather than just stamping out the closest fire.

  • Comment number 85.

    re. #56 grimupnorth

    Crash Gordon thought if he got Merv. to lower interest rates, the credit crunch would be eased because borrowing would be cheaper.
    He forgot to beat the banks about the head so they would pass on the lower rates.

    Crash didn't realise that most of us have been coping fine with base rates at 5%, only the buy-to-let market and reckless over-borrowed companies (and useless banks) were causing the problem. And you wont save most of them.

    By lowering interest rates, he has destroyed the currency and raised import costs. He has also encouraged foreign investment to scarper or stay away. He has also wiped out all momentum for savings (effectively zero % interest).

    The banks really only wanted incoming funds to shore up their books, and big loan guarantees from the Govt. That would have bought them the time they needed to think up a new ruse to rip their customers off.

    All Crash's plans -developed on the hoof, have been poorly thought out. His latest plan is to devalue everything and re-calculate all assets and debts using a hyper-inflated cheapo pound.
    And don't listen to anyone who tells you that quant-easing isn't printing money -cos it is. New subtle spin from Whitehall... of course it isn't, it is CREATING money.... ker-chinggg, er not actually printing it.

    Your pound is going to be worth 70p, your granny is going to have to live off her capital, and your house may just hold it's cash value, just that the cash is down by 30% in real spending terms.

  • Comment number 86.

    When a company like Tesco's extends the time they will take to pay suppliers from 30something days to 75 with out a by-your-leave, it should come as no surprise to find that this countries SME's are floudering.

    No politician, least of all Our Glorious Leader has necessary nounce or will to grasp these economic nettles and deal with them in a way that is inovative, decisive and as best that can be managed... consensual.

    In short... we all doomed!

  • Comment number 87.

    Private Equity and Asset Stripping in Simple Terms....

    Joe Manufacturer makes crystal widges. The raw material and energy costs, etc to make a crystal widge amounts to £30.

    Joe Manufacturer sells his crystal widges for £55.

    So to produce a crystal widge, Joe has to invest £30 before he gets his money back later on sale plus £25 profit.

    Originally, Joe started up with a loan from a family member, or a bank, etc, but over the years the profit from his operation (lots and lots of £25) gave him a huge profit and positive bank balance.

    So Joe keeps £1 million in his business to buy raw materials, etc in advance to make his latest batch of crystal widges. He takes all additional money out as profit by paying himself a dividend. There is no cash in the business, but the Balance Sheet shows a £1 million profit (if the business was shut down, there would end up with a positive balance of £1 million in the bank).
    So the business is successful, but has no money in the bank, except the stream of £25 coming in, which go out as dividends to the owner.
    This is OK.

    Now Johnny Asset stripper (a Private Equity Fund) comes and pays £600,000 to Joe and buys the business from him (ie. the right to the future stream of £25 profits).

    But Johnny at the Private Equity Fund is smart, as he sees the Balance Sheet profit of £1 million. He legally pays himself a dividend of £1 million from the company, and pays an extra £5 per crystal widge to a trade insurance supplier to pay his suppliers (as he now has no working capital in the business to pay them) based on his future income stream of £25's (he probably also stops paying his raw material and other suppliers in good time).

    OK, so he now only makes £20 per crystal widge, instead of £25, as he has an extra £5 charge for credit.

    But now when he hits recession, instead of being able to flexibly reduce production and keep his manufacturing business ticking over during the hard times, he cannot service his debt, has no credit supplied to pay for his raw materials (credit insurance is withdrawn), and goes belly up (along with all the jobs of his workers).

    So allowing the Private Equity Funds the right to extract working-capital Balance Sheet profit from businesses must be regarded of one of government's biggest failures.

  • Comment number 88.

    Update for petition - 911 signatures so far.

    Come on, sign up now. Push the apathy aside and show some effort.

  • Comment number 89.

    Too all of the people asking why the risk was not perceived it is very simple: it was!

    How can I offer you insurance at 1% when someone is offering it at 0.1%, they would take all of my business.

    From 1998-2006 you could make good money on that 0.1% so why not?

    Sure I want to charge 1% but then I would go out of business wouldn't I, that's a certainty, but a world-wide global downturn of the scale not seen since 1930, that's only one of many future possibilities.

  • Comment number 90.

    The point made in this piece shows the logic of what the Tories are saying, albeit they seem to be failing to clearly explain themselves.
    If the goverment steps in to provide finance to business it would have to borrow every pound it lent which just grows the debt burden on all of us. In contrast by providing credit insurance, which reduces or removes risk for the banks thereby making it much easier for them to lend, borrowing only has to go up to the extent of claims that have to be funded.
    In other words in terms of freeing up the markets, there is a huge leverage effect from the provision of credit insurance as opposed to simply pumping cash into the banking system.
    Its not a silver bullet but on the assumption that only a proportion of the debt insured will go bad, gives the taxpayer, who ultimately must bear the cost, more "bang for their bucks".

  • Comment number 91.

    When I graduated in Math's, my tutor recommended becoming an actuary. After some consideration, I decided against this career. The pay is fantastic (about 50% more than I get as a mathematician in the defence sector), but I felt that a large proportion of the work actuaries do is based upon some fairly dodgy assumptions and that the maths is really 'pseudo-maths'. This I felt, and still feel, would ultimately be unrewarding. It gives me little (but some!) satisfaction to see that I may be proven correct. I do not believe that the majority of actuaries fully understand what they do, or appreciate the underlying weaknesses of their methodologies.

    A very good book aimed at the lay-economist (like me) is The Undercover Economist by Tim Harford. In it is a very good description of why insurance of this type is bound to be problematic. The example used is actually the US health care system, but trade credit insurance seems very analagous (at its crudest, only those that think they will need it take it out i.e. only the sick/subprime insure themselves).

  • Comment number 92.

    61. At 10:28am on 12 Jan 2009, Emzdad wrote:
    Not on the insurance track, BUT, can anyone comment that when the new superbank comes into being, if there is a branch of Lloyds and a branch of HSBC in the same town/street, as there is here, which one is likely to close?

    ANSWER

    The one that gave better customer service... doh!

  • Comment number 93.

    it is quite amazing that there is no shortages of Economic experts but all they spout is OPINION, it is all THEORY (HOT AIR), but few facts !

    our blessed City thinks so short term, one day ahead is long term !

    so many blame GB for all of our ills but I can remember the squandering of the windfall of North Sea oil spent to keep many millions unemployed with the legacy still visible today in certain parts of the UK.

    this recession is different because it is hitting Tory areas not just Labour heartlands !

    no doubt many parts of our rabid print media will support the Tory party at the next election but they give that backing due to their owners diktat, not out of any logical assessment of the merits of the argument.

    the Tories have always had more experience of dealing with recessions but that does not mean their policies got the economy back to health quicker or better but they continue this "do nothing" approach and obviously would let the recession take its course !

    I am grateful that we have a Government that totally rejects that approach and is at least trying to do something.

    an ill patient gets better with suitable treatment, letting nature take its course may result in the death of the patient !

    time will tell if the current policies will bear fruit, but just scattering the seeds and doing no gardening will give the weeds an equal if not better chance !

    no doubt some will say this is class war rhetoric, maybe it is, but at least it is not "GB is to blame for everything" !

  • Comment number 94.

    One area of doom and gloom not yet discussed is the social effect of losing your job and not having any money - something that is with us now and accelerating fast.

    More divorces, suicides, depression, lack of self esteem - we're all going to know people affected by this crisis and it won't just be because they can't buy their dream house.

    A viewing of the excellent Northern comedy drama films 'Brassed Off' or 'The Full Monty' both cover these issues without leaving you totally depressed at the end.

    If you know someone who does lose their job, try and make a special effort to find some time for them.

  • Comment number 95.

    93 =

    Public sector 'worker' ;-)

  • Comment number 96.

    Post 61 & 92 I think you will find nothing happens.

    However the Halifax or Bank of Scotland branch might close as Lloyds TSB has bought HBOS not HSBC.

  • Comment number 97.

    Robert,

    Your previous articles describe the clever 'innovations' of the financial gurus in the Hedge Finds, Investments Banks and Insurance Companies used to create markets in credit default insurance etc. You have pointed out how this created a collective view across the City and Wall Street that risk was being magically massaged out of the system. The lenders were losing touch with the borrowers and old fashioned due diligence became redundant. All in the illusion of an ever expanding asset value bubble.

    It seems to me that the Government now feels obliged to step into the loop and prop up these systems with taxpayers' money, creating more massive public debt. All to try and avoid the pain of a necessary economic correction.

    Whilst there has always been a need for innovations such as this to support international trade and the uncertainties related to cross border trading risks, why should the Government now underwrite the normal trading risks. Woolworths' business plan went wrong for more fundamental reasons surely. The 'trigger' for their final demise could have been one of several issues facing their business. This is no argument for public intervention across the board such as this.


  • Comment number 98.

    @93

    you say an ill patient gets better with suitable treatment......


    The problem is the treatment he is giving is patients is weed killer.

  • Comment number 99.

    #89

    If I thought insurance should cost 1% and my competitors are charging 0.1% that means, either:

    - I have missed a very crucial point, or
    - all my competitors will shortly be going bust

    Either way, I would decline to trade rather than sell at 0.1%

  • Comment number 100.



    I challenge Roberts Peston's calculation that arrives at an average premium for trade credit insurance of £0.1%. I spent forty years or more in, or associated with, the trade credit industry - latterly as an underwriting agent, and I can assure any reader that by far the majority of policyholders would have considered that premium rate as a holy grail, particularly the smaller business with limited clout.

    Theorising tends to depend on something approaching perfection in the market - experience shows that as times get harder, either nationally, economically or corporately, then perfection (if it ever existed) goes out of the window and corruption comes in through the door. Couple this with the need for increased sales figures and targets to be met, and lax underwriting is likely to follow.


    sosraboc's points (post 40) are well made.

    I have seen instances of competing underwriters offering terms which would clearly lead to a raft of claims based on the long-standing experience of their prospective policyholder - so many that we started to compile a library of what we considered to be "suicide terms."

    I have also seen many cases where the original submission did not show a whole picture and after a "decent" interval the broker would try to slip concessions under the wire. Not surprisingly, these were often withdrawn in the face of judicious questioning. I have also seen too many cases where, for various reasons, it has been clear that a claim was either fraudulent of fanciful - sometimes due to the policyholder and sometimes due to the broker.

    And, of course, it is always possible to get it wrong and find that an apparently adequate business has a vulnerability which simply was not apparent, based on available information.

    Also, please do not confuse trade credit with CDOs and the like. If you are dealing with the kind of credit enhancement that produces CDOs, then you are looking at considerably longer terms of credit (several years) and larger numbers than trade credit commitments where sixty to ninety days is common and anything approaching a year might be considered outrageous. More importantly, you have the ability to make far more searching enquiries and conduct a deeper due-diligence. Trade credit requirements tend to work in a much shorter time-frame, with less time for due-diligence and much less ability to get information beyond that available to Companies House and the status agencies.

    John_from_Hendon in post 34 also makes good points about the use of trade credit insurance simply as an aid to finance and the problems which flow from it. Any business model which is predicated on the price and availability of credit insurance is fundamentally weak - and this throws the onus back on the banks to do their job more thoroughly.

    It is an old adage that credit insurance cannot make a bad business into a good business - and that has been proved time and time again.

    Finally, for the benefit of polit2k (post 13), credit insurance has been around in the UK at least since the early 1930's - and in less stable forms even earlier than that, but that too is another story.


 

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