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Firms aren鈥檛 in the habit of turning down work these days, but Matt Bowyer does it every day. He is director of Ductwork UK, a provider of M&E staff, and he says he is unable to satisfy at least 10% of the enquiries he receives from existing customers and 70% of those from other businesses. What鈥檚 more, the rejection rate is inexorably rising. The galling thing is that he would dearly love to take this work on 鈥� but he can鈥檛 because his credit insurer will no longer cover his key customers.

鈥淭here鈥檚 nothing worse than having to turn to customers and say, 鈥榃e can鈥檛 trade with you鈥�. You鈥檙e basically telling them you think they鈥檙e completely uncreditworthy. They know it鈥檚 not our fault but the attitude tends to be, 鈥業f you can鈥檛 provide it, we鈥檒l have to find someone else who will鈥�. It鈥檚 a hard pill to swallow.鈥�

Bowyer is facing a double hit, because there is less work out there and payment periods are lengthening, so he can ill afford to lose customers. 鈥淚鈥檝e not seen so many contractors available for a long time. It鈥檚 frustrating 鈥� the best guys in the industry are sat at home and we can鈥檛 engage them.鈥�

The reason for this exasperating situation is that there has been a sudden retrenchment on the part of global credit insurance firms. Underwriters understandably consider housebuilding and construction high-risk sectors right now, but their blanket withdrawal of cover from almost any firm exposed to these markets has provoked rising anger. Longstanding customers with sound balance sheets and strong workloads have suddenly been stripped of cover or have had their credit limits slashed with little or no warning, at the worst possible time. In many cases, companies must continue to pay a minimum premium 鈥� in Bowyer鈥檚 case, 0.7% of turnover, or 拢18,000 a year 鈥� even as their policies have become next to worthless. In the rare cases where new policies are available, the premiums are rising steeply. This has led many around the industry to wonder if the system can be fixed, reformed or simply bypassed altogether.

鈥楾he most important issue in our industry鈥�

鈥淚 get daily complaints from members,鈥� says Michael Ankers, chief executive of the Construction Products Association. 鈥淚t鈥檚 probably the most important issue in our industry and it has been for months. It鈥檚 got worse and worse and worse, and it鈥檚 really snarling up the system. Perfectly reputable companies are finding their credit insurance is withdrawn completely, not because of their business, but just because it鈥檚 construction.鈥�

Ankers has been working closely with the CBI to make the government aware of the problem, and persuade the Treasury and business and enterprise department (BERR) of the necessity of a rescue scheme, similar to the government-backed credit offered to SMEs. They鈥檝e been waiting for months now but while business secretary Peter Mandelson is apparently aware of the problem he is always a week away from making an announcement.

Construction has always been heavily dependent on credit insurance arrangements to protect firms鈥� cash flows. Companies take out policies to guarantee a level of payment should a customer fail while owing them money. They also use their insurers as a source of market intelligence on potential trading partners. But any confidence they might have had in insurers鈥� judgment is being quickly eroded.

Nicholas Howarth is the managing director of Howarth Timber Group, which has insured all its customer accounts with one of the largest providers for 30 years. Nine months ago, he noticed that it was progressively reducing its credit limits. 鈥淚t鈥檚 almost across the board. If a company is a property developer or a private housebuilder, even if the housebuilder arm is a relatively small part of the whole group and there鈥檚 no chance of it going out of business, it is getting its limits zeroed. They鈥檝e cancelled limits at quite short notice. In previous recessions, we鈥檝e been able to use the lead taken by underwriters as a useful indicator of the probability of business failure. But because they鈥檝e taken such a shotgun approach, you鈥檝e almost got to ignore the fact that customers have got no credit.鈥�

Howarth feels he has no choice but to disregard the insurers鈥� assessment: 鈥淚f your main market is resi new build, and you鈥檙e in the position where two-thirds of your customer base has had their limits zeroed, you either continue trading or you shut up shop. If we couldn鈥檛 deal with 15 of the largest 20 housebuilders, we wouldn鈥檛 have much of a business.鈥�

Non-negotiable demands

One of the most frequent complaints from construction companies is the insurers鈥� high-handedness. Last November, one large insulation company received a request for a meeting from Atradius, which insured many of its suppliers. The finance director duly went down to its Cardiff office and had what he recalls as a fairly amicable encounter. He worked with it to reduce credit limits by 40% 鈥� most suppliers take out far more cover than they need to be on the safe side 鈥� and hoped that would be the end of it. Then, without telling him, it started rejecting new applications for cover and threatened to pull cover completely unless the company provided a forecast for 2009 and regular trading updates. 鈥淲e said, 鈥榃e don鈥檛 have any relationship with you, so why would we?鈥� Why should we supply that information to Atradius when we don鈥檛 supply it to shareholders, to employees, to our suppliers? The next thing we knew, they鈥檇 written to our suppliers to say that unless we supplied information, they were withdrawing cover. Then in January, they did. It almost felt like once they get their claws into you, they will go as far as they can and ask for deeper and deeper levels of information.鈥�

Atradius鈥� demands for information are in stark contrast with its own lack of transparency about how decisions are made; these are often hidden behind the confidentiality agreements it says it must give companies. The insulation supplier was told only that the information he provided would be scrutinised by 鈥渢he committee鈥� but his attempts to find out who they are or speak to them have been frustrated.

This is aggravating the sense of injustice, and feeding conspiracy theories that these global firms have made a unilateral decision to withdraw from UK construction. 鈥淚n previous recessions, they didn鈥檛 take such a broad sector approach,鈥� says Howarth. 鈥淭hey looked at company figures and took a company by company view, and they weren鈥檛 withdrawing cover but reducing it.鈥�

In any recession there are winners and losers. Our role is to help our clients to pick those companies that have the greatest chance to withstand it fabrice desnos, euler hermes uk

How the insurance industry has changed

The difference in previous recessions, Howarth believes, is that the companies were UK-owned and had a long-term interest in the market. Three firms now underwrite more than 70% of the UK credit insurance market: Euler Hermes and Coface are both French and operate in more than 50 countries; Atradius is based in the Netherlands and majority-owned by a Spanish insurer, and trades over a similarly wide area. Euler Hermes and Atradius were the first to react, and Coface issued a statement detailing reductions in cover on 16 March.

Brokers also believe the withdrawal is part of a bigger picture. Sally Del Principe is an associate director at broker Perkins Slade and heads their credit insurance division. She is considered an industry expert and has been advising the Treasury on the impossibility of placing new business 鈥� some policyholders have had as much of 80% of their cover pulled. 鈥淚t鈥檚 a nightmare, really. There鈥檚 no flexibility, no negotiation. They鈥檙e pulling cover in tranches. We鈥檝e had five tranches of withdrawals, and there鈥檚 100 customers in each tranche. I call it 鈥榗ulling鈥�.鈥�

She鈥檚 taken her clients鈥� customers to meet the major players to demonstrate that they are adhering to a clear risk-management strategy 鈥� to no avail. One senior underwriter told her that were it up to him, he would insure her client, but that the decision from Europe was to withdraw. 鈥淭he committee鈥� does exist, she says 鈥� it just has no influence.

Construction firms suspect that the insurers who happily took their premiums through the boom years have made a fast buck and now a swift exit, just as the policies they sold are most valuable. But figures from the Association of British Insurers show that credit insurers are losing more than they ever made. In 2007, they received 拢334m in premiums for 13,700 policies, covering 拢282bn of turnover. To put these figures in perspective, industry insiders estimate the collapse of Woolworths (under 拢385m of debt) last autumn could have cost insurers well over 拢100m. Del Principe鈥檚 view is that insurers acted irresponsibly, offering lower and lower premiums to win market share, but left themselves precious little in reserve for a rainy day 鈥� hence the hasty retreat as claims rise.

Insurers themselves blame the banking system for leaving companies with no access to credit, thereby increasing their own risk of claims. Nobody else predicted the scale of the economic collapse, they say, so how were they supposed to? 鈥淭he scale of this thing is unbelievable,鈥� says Bob Lilley, managing director of CIFS, one of the smaller UK insurers, which has taken a less draconian approach. 鈥淢y finger hovers over the nuke button from time to time,鈥� he admits. 鈥淚t鈥檚 easy to go down that road, but it鈥檚 something we haven鈥檛 been doing. We鈥檝e taken cover down but we haven鈥檛 done it in a knee-jerk way. We鈥檙e trying to manage our way through it through constant contact with policy holders. There鈥檚 a hell of a lot of work that goes on.鈥� He did lose business to the big three during the buyer鈥檚 market of the boom, he says, because he was not prepared to cut his premiums.

As for the big three, they deny that they have taken a blanket approach to UK construction. 鈥淭hat鈥檚 totally untrue,鈥� says Fabrice Desnos, chief executive of Euler Hermes UK. 鈥淭he construction sector is obviously important for us, it鈥檚 always been important. We still have a huge number of clients that we鈥檙e trying to support in a particularly difficult time. In any recession there are winners and losers. Our role is to help our clients to pick those companies that have the greatest chance to withstand it. When we withdraw cover from a good and viable business, they will continue to trade and we will lose out.鈥� Premiums inevitably rise with the risk 鈥� it鈥檚 up to companies to decide whether they can afford them.

Can the system be saved?

Fortunately, companies are mostly choosing to trade even without credit insurance, though those like Bowyer who use factoring arrangements 鈥� where they sell on invoices for money to maintain their cash flow 鈥� cannot supply companies not covered by insurers. The CBI is optimistic that Mandelson will soon announce a top-up scheme, as the French government did last autumn, under which it takes on half of the insurer鈥檚 risk. But it鈥檚 been considering such a scheme since January and critics complain that the longer it waits, the less cover there will be to top up. In any case, it is unlikely to be a panacea. As Desnos says, 鈥淣ot all risk can be insured. It is not reasonable to ask the government to underwrite the whole economy鈥�.

The most common analogy that construction bosses use to describe credit insurers is of umbrella salesmen who are happy to sell you a brolly in the sunshine but who whip it away as soon as it rains. So it is interesting that Desnos also compares his business to selling umbrellas, when he describes a large increase in applications for cover. 鈥淲e are very selective in terms of our ability to take on new clients. If we were selling umbrellas and the rain starts to come, suddenly everyone wants to buy one.鈥�

But a great many others are contemplating a future without these policies at all. Rudi Klein, chief executive of the Specialist Engineering Contractors Group, has tabled two amendments to the Construction Bill, currently going through parliament, which he hopes would render insurance largely unnecessary. Del Principe is working on a number of self-insurance arrangements for her clients, and Bowyer is among many reconsidering their business models.

Retirement housebuilder McCarthy & Stone had its cover withdrawn last autumn but Michael Ball, its chief financial officer, says its relationships with its hundreds of suppliers were strong enough to survive. A couple asked for reduced payment periods, but none stopped supplying it. But he wonders: 鈥淲hen there are happier times, firms will have to ask themselves whether they want to waste one, two, three per cent of their turnover on insurance.鈥�

Desnos is not worried. 鈥淚 see the number of companies that we are helping to keep in business by paying claims and I鈥檓 sure these people will remember.鈥� He may be in for a shock when the sun comes out again.

The construction industry will certainly remember 鈥� but those memories will be of the betrayal they felt when the insurers they trusted deserted them at their hour of need.