Too big to fail?
Credit risk profiling is changing for many businesses, following recent high profile insolvencies.
Groceries wholesaler Palmer & Harvey is an example of risk which has been poor for a long time, due to the well published debt burden and changing business model. It is a failure that many could say they saw coming for a while.
In comparison however, Carillion, deteriorated rapidly and went from a stable position (being awarded many government contracts), to insolvency within around 18 months. For these companies the deterioration period was different, but on both occasions credit insurers were staying on risk due to information they were receiving that wasn’t in the public domain, for example refinancing and potential new deals. This has resulted in multi million pound claims being submitted and paid to support clients cash flow.
As reported in the press the failure of Carillion took many sub-contractors by surprise, but has called in to question why businesses have not considered credit insurance and subsequently a potential domino effect in the supply chain as a possibility. Figures suggest that not much more than £30 million in cover will be paid out to small companies claiming for non-payment of invoices. About 30,000 British businesses are estimated to have been affected and are owed as much as £1 billion in total. (Carillion victims pay for lack of insurance, The Times, January 25 2018)
It is important to know your customer and even know your customer’s customer but in the case of Carillion the customer was ultimately the UK Government. This lulled many into a false sense of security, even when profit warnings were issued the government continued to award contracts including UK’s controversial High Speed 2 railway, therefore giving the view that the business was too big to fail. It is for these reasons that there is sense of how could this have been predicted or how can we protect against a future Carillion?
At Aon, our team of experts can support you to;
- Understand how your business is perceived by credit insurers
- Help you improve how your business strategy and results are communicated
- Better understand your debtor profile
- Understand insurer policy wording with technical advice
- Negotiate overdue debt restructure and collection action
The insurance industry says it understands that credit cover is not always a priority, but one executive warned: “It is not just the cover that is provided, but the insurers also act as an early warning system because they will have market intelligence on what is happening in a sector and may be able to advise businesses to revise their exposure to certain customers.” (Carillion victims pay for lack of insurance, The Times, January 25 2018)