Speaking at the National Association of Paper Merchants' (NAPM) policy group, the broker warned that further paper sector insolvencies are expected.

It said because credit insurance costs may rise by 10%, credit insurers could withdraw cover from the paper market because of tougher economic conditions.

James Bowker, leader of the paper sector at Aon Trade Credit, said: "Paper merchants have been hit by a number of debtor failures and some credit insurers are now losing their appetite in this sector, which is facing the most difficult business environment for at least a decade.

"As a result, we're working with those insurers which are closest to the sector, which are most willing to visit our clients' customers and therefore have the best understanding of the issues."

The company attributed the paper industry's rise in insolvencies to businesses failing to absorb increases in fuel and power, and failures as a result of banks not renewing facilities.

It also said the 15% deterioration in sterling was forcing merchants to further raise prices for UK importers.

Pre-packs – when a new shareholder comes into the business – have also become an increasingly common form of insolvency, comprising 25% of claims handled by Aon in 2007/8.

Over the years, merchants have frequently spoken out against customer insolvencies and pre-pack deals.

Many have said that insolvencies are potentially the most significant issue that merchants face, with pre-pack arrangements said to be more like a supplier "stitch-up".

In February this year, NAPM director Tim Bowler said merchants were becoming "fed up" with pre-pack deals and warned they were occurring far too often.

To help prevent slashed credit limits, Aon suggests meeting underwriters more frequently and working with other members of the NAPM to create strength in numbers.

It also suggested that a company makes sure it has adequate credit limits in place and keeps a close eye on customers requesting extended trading terms.