Builders merchants, building companies, developers and manufacturers in the construction sector could be refused credit insurance if the number of insolvencies rises to predicted levels.
Aon Trade Credit has warned that a very large spike of insolvencies predicted towards the end of 2008 could mean that credit insurance, which covers bad debt following the insolvency of a customer, could cost at least 10% more% but, more worryingly, could lead to underwriters withdrawing cover.
David Thomas, director for Aon Trade Credit, said: “With insurers’ loss ratios running in excess of 130% on recent years, we are predicting a severe increase in premium rates and an inability to negotiate long term trade credit insurance arrangements. As a result, this is a very busy point in the UK construction insurance cycle and underwriters with commitment to construction are now at a premium.”
The rise in insolvencies is attributed to:
>· price pressure on subcontractors with cash flow continuing to be squeezed in all areas of subcontracting, especially electrical, structural steel and specialist roofing;
· the increase in raw material costs, especially steel and aluminum, affecting margins;
· plummeting demand for residential house building and a substantial reduction in commercial building;
· payment times being stretched further and further
Aon recommends that businesses should work closely with insurers, showing them balance sheet information to prove credit worthiness and try to persuade customers to do likewise to help underwriters understand their business better.
They should also identify the need for special contractor wordings in existing or prospective wordings and think about establishing longer term contracts with insurers to help control premiums which are likely to increase with high insolvency levels going forward.