Difficulty in getting credit insurance is understood to have played a key role in Comet’s decision to file a notice of intent to hire an administrator this week. Retail Week takes a look at the issues around credit insurance.

Why are we talking about it now?

A withdrawal in credit insurance is understood to have led to electricals retailer Comet filing its intention to appoint an administrator. The withdrawal of credit in recent weeks is understood to have made it impossible for the retailer to bring in sufficient stock for its peak Christmas trading period casting doubt on the retailer’s future.

What is credit insurance and why is it pulled?

Credit insurance protects suppliers that provide goods against the retailer defaulting on payment. Insurers look at the financial stability of the retailer, the indebtedness of its owner and market it trades in when deciding what cover to offer suppliers.

The economy, of course, has an impact on terms and cover and during the height of recession many insurers withdrew credit from suppliers to UK and European retailers. Despite worries about the impact of more retail administrations, the UK’s largest trade credit insurance firm Euler Hermes this year refused to extend levels of cover to the UK retail sector.

Is withdrawal of credit insurance a common issue?

Yes, it’s quite a common factor in the collapse of large retailers. Losing credit insurance played a part in the demise of Woolworths, Focus DIY and Zavvi. A lack of trade credit insurance makes it difficult to trade, with alternatives like payment of goods up front causing severe cash-flow issues.

Is the system fair?

Some have argued that the rules by which cover is given or withdrawn are opaque and have accused insurers of reacting to unsubstantiated reports about a retailer’s woes.

The Government did intervene in 2009 and introduced a £5bn credit insurance top-up scheme through which it vowed to match private sector trade insurance if insurers reduce their cover.

However, the £5bn was a complete failure, according to Barry Gross, commercial real estate partner at law firm Berwin Leighton Paisner. “It showed that ultimately the Government didn’t want to insure the same people that credit insurers wouldn’t insure,” he says.

Is anything being done now to change the system?

Business leaders have been canvassing government representatives to ease pressures around credit insurance, however little headway has so far been made. The Department for Business, Innovation and Skills is understood to be planning a meeting with the BRC to get a broader sense of how credit insurance is functioning throughout retail.