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Trade credit reinsurance scheme launched in UK

4th June 2020 - Author: Luke Gallin

Trade credit insurance coverage is set to be maintained across the UK market in light of the ongoing COVID-19 pandemic, with up to £10 billion in government backing through the Trade Credit Reinsurance scheme.

It was reported towards the end of April that the UK government was considering the implementation of a trade credit reinsurance backstop to prevent the widespread withdrawal of cover across sectors such as manufacturing and retail.

As the COVID-19 outbreak continued to spread and businesses struggled to pay bills, concerns mounted over potentially significant declines in the availability of trade insurance, or premiums increasing to unaffordable levels.

In response, the UK government has now confirmed that the region’s trade credit insurance market will receive up to £10 billion of government guarantees. Through the Trade Credit Reinsurance scheme, which has been agreed following extensive discussion with the industry, the large majority of trade credit insurance coverage will be maintained in the UK.

Business Secretary of State, Alok Sharma, said: “Trade Credit Insurance is a daily necessity for hundreds of thousands of businesses across the UK – particularly those in non-service sectors such as the manufacturing and construction sectors.

“Our £10 billion guarantee gives peace of mind to businesses, allowing them to continue to trade and maintaining liquidity in supply chains. This reinsurance scheme is an important step as we carefully set about firing up our economy as we emerge from the pandemic.”

The Economic Secretary to the Treasury, John Glen, commented: “Billions of pounds of business turnover is supported by Trade Credit Insurance each year. This reinsurance scheme will see the government and insurers working closely together to ensure that the vast majority of this cover remains in place. This means that businesses and supply chains can continue to be protected at this pivotal time as we begin to kick start the economy.”

The scheme sees the UK government act as a reinsurer to the trade credit industry, and is designed to support supply chains and help businesses trade with confidence during the current crisis, knowing that their protected against defaults or payment delays.

The Trade Credit Reinsurance backstop is available on a temporary nine-month basis, backdated to April 1st, 2020 and running until the end of December, with the potential for an extension.

BCC Director General, Adam Marshall, said: “The government has demonstrated once again that it is listening to the concerns of our business communities. The launch of a government-backed guarantee to support the provision of trade credit insurance will help ensure that this vital lifeline remains available to businesses during and after this crisis, helping to maintain supply chains and trade.”

Stephen Phipson, CEO of Make UK, added: “For most manufacturers, credit insurance is essential – giving them certainty that they will be paid for the orders they deliver. We’re pleased that the government has taken action to jump-start the credit insurance market – which will provide a welcome boost to our nation’s makers as they recover from the COVID crisis.”

Trade credit insurance underwrites roughly £350 billion of economic activity of more than 630,000 business in the UK each year, insuring suppliers selling goods against the firm they are selling to defaulting.

The scheme, which is to be delivered through a reinsurance agreement, is available to all insurers currently operating in the UK marketplace, and covers both domestic and overseas trade with payment terms of up to two years.

The UK government adds that under the terms of the scheme, participating insurers are required to comply with certain undertakings regarding the conduct of their business during the scheme period. This includes that insurers will forgo profits and will also not pay dividends or bonuses for senior staff for their guaranteed trade credit insurance business.

IoD Head of Europe and Trade Policy, Allie Renison, said: “These measures are a lifeline for many businesses with nowhere else to turn. To help the economy get up and running again, maintaining confidence in supply chains is crucial, and we are encouraged to see this come as the product of collaboration between government and industry.”

CBI Director of Financial Services, Flora Hamilton, added: “The new government guarantee to backstop trade credit insurance will be welcome by businesses across the UK. The TCI scheme will support supply chains, enable many to prepare for restart in earnest and bring employees off the job retention scheme and back into work.

“This is a very critical step, along with other government financial support, in driving the recovery of the UK.”

The implementation of the new scheme is subject to state aid approval, agreement of full form documentation with insurers and acceptance of applications from insurers for participation. Additionally, the UK gov confirms that the scheme will be followed by a joint BEIS/HMT-led review of the trade credit insurance marketplace, to ensure it can effectively support businesses in the future.

Atradius has welcomed the reinsurance backstop scheme, describing it as a recognition of the important role played by credit insurers in modern trade.

Alun Sweeney, Regional Director UK & Ireland at Atradius, commented: “We have recognised from the very beginning of this Covid-19 crisis that the consequences for trade would be significant and we very much welcome this positive and supportive response from the Government. As an industry, we remain aligned in regard to the need for this kind of action and together with our colleagues at the Association of British Insurers we have been committed to make it a reality.

“The Scheme is an essential measure to help boost our economic recovery, help protect the supply chain, safeguard jobs, and increase business confidence and will make a real difference to the thousands of businesses who rely on the security that trade credit insurance cover provides.”

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