Trade credit insurance: a case study

If you’ve been actively considering taking out Trade credit insurance for your business, or you’re a new policyholder harbouring doubts about its value, you’re probably in need of some hard evidence.

It’s all very well reading lists of its functions and benefits, as compiled by insurers, but what has trade credit insurance really done for other companies? And would they recommend it?

We speak to Wingate Electrical Plc’s Financial Director John Munro to find out why the company took out credit insurance and how it has helped the business.

Client case study: Wingate Electrical Plc

Wingate Electrical is a family-owned company that provides electrical, mechanical, security and communications services to clients in the construction, energy, rail and air transport sectors, from 10 operational centres across the UK. Its contracts are often large-scale and high-profile, with past projects including the London 2012 Olympic Park, Heathrow Terminal 3 Integrated Baggage Facility, and the huge Gwynt y Mor offshore wind farm.

Protection against financial loss is, therefore, top of the agenda for the company directors. As such, in 2006/7 the decision was made to implement credit insurance.

“Wingate Electrical has a wide client base, but ultimately a substantial part of the business was reliant on around 10 major clients. We took out credit insurance to protect ourselves from what we considered to be a catastrophic failure – the collapse of one of our major clients,” states Financial Director John Munro.

At that time, with global economic downturn on the horizon, the fear of failure was high – and this climate was, unsurprisingly, one of the main drivers behind the decision.

“Previously, there had been an assumption that governments would bail out large institutions because they were too big to fail. All that changed with the collapse of global financial services firm Lehman Brothers,” John explains.

There had been an assumption that governments would bail out large institutions because they were too big to fail

Even now, with the late 2000s recession behind us, we are reminded of the volatility of the market and just how widespread the effects of sudden business failure can be. Take, for example, the shock downfall of construction and facilities management contractor Carillion, which has been dominating the news headlines of late.

“Apart from the obvious point of recovering debt, the credit insurance policy protects us from sudden hits to profits. Even a failure affecting some of our smaller business units could have the potential to wipe out profits for the whole year,” John points out.

“Plus, if our insurer reduces a credit limit for a particular client, it’s an early warning to us. It flags up issues that we may not otherwise have been aware of,” John continues. “This gives us an opportunity to reduce our liability before a situation becomes critical.”

The realities of credit insurance

Since taking out credit insurance 10 years ago, Wingate Electrical has found itself in a claim-making position on several occasions. Each time, without exception, the situation has arisen as a result of a business failure.

The claims have varied in size and complexity, but the most recent has been by far the largest, at c£170,000. “The claim, which resulted from client insolvency, was quite complicated. It covered outstanding balances on a number of contracts, outstanding retentions, balances in dispute and a substantial credit limit that had been removed by the credit insurers a few months earlier,” John explains.

“We discussed the situation with our broker at Alan Boswell Group, who suggested that we compile a schedule of losses and then approach the insurer prior to submitting the claim. All three parties got together, and we were able to put forward our case directly to the insurers so that they understood our position. In addition, they were able to explain the requirements they had in order for us all to arrive at a satisfactory conclusion. The claim was then submitted with a reasonable degree of certainty as to its success.”

This proved to be an invaluable exercise. The claim was agreed within four weeks of submission and paid within a further two – all just two months after Wingate Electrical’s client went into liquidation.

“As an SME, we can’t be experts in all areas. We aren’t big enough to employ specialists in legal, financial or insurance support services, for instance. It’s useful to have an independent broker to assist us in arranging credit insurance and preparing claims, to maximise the value of the policy.”

Credit insurance: The verdict

So, after a decade as a policyholder at Wingate Electrical, what does John really think about credit insurance?

“Essentially, credit insurance is no different to any other insurance product – you don’t want to use it, but it provides a certain level of protection if things go wrong,” he says.

“At Wingate, credit insurance is part of our armoury to manage risk within the business. It’s not a silver bullet to debt management, but it’s an additional tool that can kick in when things go wrong. After all, from an overall business perspective, it’s much easier to budget for a credit insurance policy, than for bad debts through insolvency.”

Credit insurance is part of our armoury to manage risk within the business

The policy has also led the company to review and streamline many of its internal processes, and helps it to concentrate on clients that are more prone to financial difficulties. This enables the business to avoid exposure to bad debts or significant one-off hits, and to achieve sustainable increases in turnover and profit.

“Every new client is now credit checked so that we can understand the risk of contracting with them,” John elaborates. “Sometimes it will change our approach – we may insist on shorter credit terms or a payment upfront. In some cases, we may assess that the risk is too great and decline to work for the client.”
Ultimately, then, he would recommend credit insurance to other businesses; but, as with any type of insurance, it’s all a game of chance. The question is whether you can afford to gamble without it.

“Would we have survived without credit insurance? So far, the answer is probably yes,” he admits. “But that doesn’t mean the same will be true tomorrow, or next year. You never know what’s around the corner.”