The cost of credit insurance is set to rise after Euler Hermes, the world's market leader, issued a profit warning after the collapse of Woolworths, the British retailer.

Claims have flowed in from the retailer's suppliers, notably in Britain and Germany, forcing the credit insurer to cut its 2008 profit forecasts yesterday, in turn sending its shares into freefall.

Insurance premiums could escalate to offset an increase in claims linked to corporate failures, according to Fabrice Desnos, the chief executive of Euler Hermes in the UK and Ireland.

His comments came after the company, owned by AGF-Allianz, the German insurance group, said that it expected to lose up to €52 million (£44.2 million) this quarter.

The announcement stunned analysts, who had been expecting a fourth-quarter profit of about €18 million. The insurer recorded a net income of €152 million in the first nine months of the year.

Euler Hermes - which controls 36 per cent of the global credit insurance market - attributed the downturn to Woolworths being placed in administration with debts of £385 million. The credit insurer is receiving claims worth millions of pounds from around the world. The credit insurance sector faces grim prospects amid a rise in bankruptcies and a concurrent increase in payment default claims. “Euler Hermes does not expect any major improvement of the actual claims' environment in the coming months,” the insurer said in a statement.

“The general trend of a rise in company failures will continue,” Nicolas Hein, the insurer's financial director, said. “Our customers are facing an exceptional situation, with sales falling, cashflows reducing and bank requirements which mean they are not necessarily getting hold of the liquidity they need . . . The underlying trends are not good and the environment is very unstable.”

Mr Hein said that its combined ratio - a measure of profitability that sets revenue from premiums against claims and costs - would only just reach 100 per cent this year. This is the break-even point, above which an insurer starts to pay out more than it is earning.

Pierre Flabée, a Kepler Capital Markets analyst, said: “Woolworths is a big claim and there could be others coming. We are entering the most difficult phase for credit insurers.”

The slump in profits of credit insurers will heighten fears that companies could find it difficult to get insurance. In recent weeks, Euler Hermes, Atradius and Coface - which between them control more than 80 per cent of the world's credit insurance market - refused to write policies for suppliers to General Motors and Ford in the United States, exacerbating the squeeze on credit.

Mr Hein dismissed suggestions that the insurer could pull out of the most-exposed industries, making credit even harder to get. The insurer would “stand by our customers in good times and bad”, he said.

As corporate financing has dried up, the role played by credit insurers has attracted attention. Alan Duncan, the Shadow Business Secretary, said yesterday that 12,000 British companies had had credit insurance cover withdrawn in the past week. He urged the Government to form a state-backed body to provide trade insurance to businesses.

Euler Hermes has a 35 per cent share of the British market, worth an estimated £350 million. Its shares closed down 5.45 per cent at €34 in Paris.

Numbers game

50 countries in which Euler Hermes operates

6,000 staff employed

36% share of the global credit insurance market

€2.1bn group turnover in 2007

€407m net profit in 2007

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