Unintended Consequences of Supplier Credit Insurance

Reported News:

The stationery chain Paperchase has come under mounting pressure after one of its main credit insurers reduced cover after a slump in profits.

Euler Hermes has refused to cover new contracts with Paperchase’s suppliers, although the retailer’s existing agreements with suppliers are unaffected.

The move follows a similar row over insurance cover at the struggling department store chain Debenhams, which has fought off claims that it is about to go bust after it was refused cover for new contracts. A withdrawal or reduction in cover can mean that suppliers demand payment upfront, putting a strain on cash reserves.

So one of Paperchase's credit insurers has reduced supplier insurance cover after a slump in Paperchase's profits.

The purpose of this insurance is to allow Paperchase to get good on credit rather than paying cash upfront.

The insurance reassure suppliers that if Paperchase doesn't pay for then the insurer with its deep pockets will pick up the tab.

With insurance cover reduced or withdrawn, suppliers are likely insist on payment upfront.

That puts a strain on Paperchase's cash, which doesn't help if it has already had a slump in profits.

Insurance cover protects against two things. One of them is intended and the other is not intended.

The intention is that it protects suppliers against the risk of Paperchase's debtors going bad.

However, it also allows the mismanagement of Paperchase to run on.

The tendency to use the knowledge that someone else will pick up the tab if all else fails must surely encourage risk.

How can a supplier or indeed the insurance company distinguish between risky debtors and mismanagement?

It does it in the same way that a bank decides whether to lend to a company or let it run an overdraft.

If the bank does its job properly then it spends time to scrutinise the company, to get to know it and understand the management.

I wonder whether insurance companies do that? In this fast-moving world, I cannot imagine they do.