THE CURSE OF CREDIT INSURANCE

In 2008 Woolworths came under increasing pressure, ultimately leading to its demise as trade credit insurers withdrew their cover for their suppliers. The demise of Woolworths contributed to the closure of the high street shop music chain Zavvi.

HMV are now coming under increasing pressure as trade credit insurers have either reduced or withdrawn their cover for suppliers.

In a letter published in The Times newspaper on the 20^th January 2011, the executives, who include bosses of the four largest record labels – Sony, Universal, Warner and EMI – say: “HMV is at the heart of our industry, and they have the full support from each of us.”

In contrast the insurance companies would not explain the reasons why they are concerned about HMV.

Credit insurers are just as powerful if not more so than banks. Prior to the widespread availability of credit insurance, businesses made an informed decision on the credit terms they would offer based on references, previous trading history and their experience with the customer.
In fact that is what credit insurers do, they take information from many different sources make a decision whether to maintain, increase, reduce or withdraw the limit of credit they will insure. Cover may be withdrawn without prior notice and therefore such actions could be potentially damaging to the brand, the reputation and trading ability of the company.
Even worse is the fact is that you may not know that your customer has even taken out a credit insurance policy on you. There is no duty to disclose the fact that they have done so and you may find out they have done so only when its too late.

HMV could not have asked more from their suppliers than the public statement of support made from the music industry to counter the adverse publicity created by the insurer’s decision. By making their statement, the record labels are endorsing HMV’s management team. In addition their decision to make public their decision to bring in team from KPMG’s corporate finance department to help renegotiate the terms of its loans was design to restore confidence mitigate the damage done to the brand and prevent a total decline of their share value.

It is ironic that business continuity practitioners often refer to the fact that insurance does not protect your brand your reputation, where as a business continuity plan does. I doubt whether they ever considered that an insurance policy could actually damage your reputation, your brand, trading ability or as in the case of Woolworths bring down an institution.

I hope HMV finds a way to survive with the help of its suppliers and continues to be a force on the High Street for years and generations to come.