The UK Treasury announced it is creating a government-backed temporary reinsurance scheme so businesses can continue to access trade credit insurance during the COVID-19 crisis.
The scheme will be delivered through a reinsurance agreement with trade credit insurers currently operating in the market and is expected to be in place by the end of May, said HM Treasury in an announcement.
Such a move is necessary because businesses with supply chains, which rely on trade credit insurance, are finding it difficult to maintain coverage. Due to the coronavirus and businesses struggling to pay bills, “they risk having credit insurance withdrawn, or premiums increasing to unaffordable levels,” explained the Treasury.
“The scheme could help speed up the economic recovery, ensuring the continued availability of trade credit insurance in the face of unprecedented financial pressures currently being faced across most business sectors,” according to the Association of British Insurers (ABI), which welcomed the government’s announcement.
“If implemented correctly,” said the ABI, “this government-backed scheme should allow businesses to continue to access cover against the risk of supply chain insolvencies.”
Similar action has been taken in Canada and other European countries such as Germany, France and the Netherlands.
The backstop will ensure that trade credit insurers can continue to provide cover for UK businesses “by taking on more risk than they otherwise would have been able to,” the ABI continued.
Trade credit insurance protects businesses if customers in the supply chain who owe money for products or services do not pay their debts, or pay them later than the payment terms dictate – a situation being exacerbated by the coronavirus pandemic, ABI explained.
The Treasury said it will work with businesses and the insurance industry to ensure that firms are supported and that trade credit risk is “appropriately shared between the government and insurers.”
The guarantees will cover trading by domestic firms and exporting firms and will provisionally be in place until the end of the year.
“As we emerge from lockdown and restart the economy, we have worked with government to outline the difficult trading environment that lies ahead, and this government-backed scheme, once implemented, will help businesses and their supply chains get back on their feet,” said James Dalton, ABI’s director of General Insurance Policy, in a statement.
“The scheme could help protect the supply chain, safeguard jobs and kick-start the economy, boosting business confidence as we begin to emerge from the dark shadow of COVID-19,” he added.
“The priority now is to urgently work through with the government how this scheme will operate in practice so that it can support businesses through the difficult trading environment, now and in the months ahead,” Dalton continued.
In its announcement about the guarantee, the Treasury cited some figures about the trade credit insurance industry in the UK:
- During 2018, £450 million (US$554 million) was paid in TCI premiums to cover over £350 billion (US$430.9 billion) in business activity
- As of April 2020, there was over £171 billion (US$210.5 billion) business activity insured, covering transactions between around 13,000 suppliers and 650,000 buyers.
- UK Insurers in Talks with Government About Creating Trade Credit Backstop
- Germany to Provide Credit Insurance Guarantees to Keep Trade Flowing: Sources
- EU Countries Give Guarantees to Credit Insurers to Prevent Coverage Cuts
- Insurers Face Big Investment Losses, Trade Credit Claims from Coronavirus Crisis
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