Reinsurance premiums are expected to rise steeply in the months ahead as the credit crunch turns into a recession. As the renewal season gets into full swing, brokers expect that the major credit insurers, who offload risks to reinsurers through markets like Lloyds of London, will see a rise in premiums of more than 10 per cent.
A broker from Lloyds said that the rises were much greater than had been expected. However many people would think that they were getting what they deserved, given that they had withdrawn cover from so many companies recently.
The credit insurance industry covers businesses against bad debt, either through insolvency, or long term default by their customers. As the number of claims submitted by suppliers, increases, reinsurers are reviewing the rates that they will charge in future to buy risk.
80 per cent of the global credit insurance market is controlled by just a few companies, which include such leading players as Coface, Atradius and Euler Hermes. These companies have received a lot of bad press recently following the withdrawal of cover for suppliers to high street names like JJB Sports, DSG the owner of PC World and Dixons, as well as retailers in which Baugur, the Icelandic investment firm, had an interest.
Recently the decision by Atradius to reduce cover to the suppliers of PC World and Dixons resulted in their shares tumbling by more than 30 per cent in a single trading day. These three market leaders have also withdrawn cover to the ailing giants of the US car market, Ford Motor and General Motors, who have approached Congress for bailout funds following a dramatic fall in car sales.
A leading expert in the restructuring of companies felt that credit reinsurers had overreacted. Their knee jerk reaction had underlined their lack of understanding and knowledge of the companies. Rather than leaving themselves exposed they decided to withdraw cover to safe guard their interests come what may.
However this criticism was dismissed by a senior manager of a leading credit insurer, who said that the press loved stories of cover being pulled, as it boosted circulation, but there were many companies benefiting from credit insurance and these benefits would increase as the downturn deepened. Now was the time to act rather than be paralysed by fear, he said.
Gloomy predictions are rife as Britain slides into recession. Leading experts predict that business failures in the UK will rocket by over 50 per cent in the next year with the construction industry seeing the first wave of receiverships. 25 pre cent of all credit insurance policies in the UK are believed to be written for companies within the construction sector.
One question to which recent events inevitably give rise is whether we are likely to see a resurgence in insolvencies amongst reinsurers, along the lines of the early 1990s, as a result of the credit crunch - or whether stronger levels of capitalisation in the industry will lead to nothing worse than a little local restructuring.
The headlines of the past weeks and months have focused on banks, primarily in relation to sub-prime lending and derivative products, and the resulting hiatus in the availability of credit. As the case of AIG has shown, though, it would be unwise to regard insurance companies as immune from recent events.
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Article Source: http://EzineArticles.com/?expert=Michael_Challiner
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