Laurie Harton of Hanwell Atkinson Ltd takes a snapshot of the UK economy, especially the strength of the recovery, and how well the credit insurance market is placed to manage both future challenges and opportunities:
The IMF announced in April that they had underestimated the rate of economic growth for the UK, which it now forecasts at 2.9% for 2014. This contrasts starkly with the prediction of 1.5% given 12 months ago. Assuming that the IMF have “got their sums right” this would place the UK as the fastest growing economy of the G7 nations. This coupled with falling inflation surely means that the UK economy is now in rude health and moving from strength to strength? Unfortunately, the situation is not that straightforward.
There is no question that the country’s emergence from recession is patchy, with a significant element of the growth coming from the service sector and from increased consumer expenditure rather than from any sustained resurgence in manufacturing and export. True, construction, specifically house building, is experiencing something of a recovery but that in itself has worried some commentators who sense the possible creation of yet another house price bubble; and we all know what happens to bubbles! The recovery in the housing market has also been marked by significant variance nationwide, with perceptions of the so called North / South Divide well and truly reinforced by the disparity in house price rises between London (11%) and the rest of the UK (4.4%).
In terms of business failures, the rate of company insolvency in the UK continues to fall, although Atradius for one predicts that UK insolvencies will remain above pre- crisis levels in 2014. One factor that may be contributing to this relatively high level of failure is the phenomenon of so-called “Zombie Companies” – enterprises that are highly leveraged and surviving “by the skin of their teeth” by just about managing to service their debts, aided by historically low interest rates. As banks and lenders recapitalise their balance sheets, there is a real concern that there may be a renewed tendency for these institutions to seek to cut their losses and withdraw financial support. For evidence of the highest possible profile, one need look no further than the recent events surrounding the City of London’s landmark building, the Gherkin, where a consortium of backers have called in loans made to Evans Randall, a Mayfair-based investment bank and a German property investor, IVG Immobilien, forcing both an insolvency and a sale. Overlooking, as it does, London’s financial heart, there can be no starker warning that the spectre of failure is no respecter (please forgive the pun!) of sector or location.
To counter the possibility of a renewed impetus in insolvency rates, the UK can boast a sophisticated and well established credit insurance market. Euler Hermes, Atradius and Coface between them may account for over 70% of the sector but there are options a plenty and quality in depth with the likes of HCC, CIFS, QBE, AIG, Credimundi, Equinox and Markel all active in the UK.
Neither is there any shortage of product options which encompass Whole Turnover (WTO) domestic and/or export, commercial and political risk, specific buyer, principal buyer and catastrophe (Excess of Loss) cover. In response to demands from policyholders, recent developments have seen the first genuine attempt – by AIG – at offering a WTO policy with non-cancellable cover, and the launch of a proverbial raft of “CAP” products, from a variety of insurers, aimed at providing cover, for additional premium, on riskier buyers, where credit limits have previously been refused or significantly restricted.
So whilst rightly there is renewed optimism about the UK economy it is fair to say that significant challenges remain. But then again, so do opportunities in equal measure.