UK Government Forms £10 Billion Reinsurance Backstop for Trade Credit Insurers

The UK government has created a £10 billion (US$12.5 billion) reinsurance scheme designed to help businesses during the COVID-19 pandemic by guaranteeing transactions insured by trade credit insurers.

The Trade Credit Reinsurance scheme is designed to support UK business-to-business transactions by maintaining credit insurance protection against customer defaults or payment delays.

Under this temporary scheme, the government will act as a reinsurer to the trade credit insurance industry, sharing the risk of losses arising from business insolvency with insurers, explained the Association of British Insurers (ABI). Under this scheme, insurers will take 10% of claims that result from business failure while the government will take 90% of the premium and claims.

The reinsurance scheme “will substantially reduce the domino effect that payment defaults can create across the supply chain,” said Euler Hermes, the largest trade credit insurer, which issued a statement welcoming the UK government’s reinsurance backstop.

The scheme will also ensure that insurance buyers, which experience temporary cash flow difficulties due to COVID-19, “do not face an additional strain from the reduction in supplier credit available to them,” said the insurer.

These measures will be available for nine months, backdated to April 1, 2020, and will run until Dec. 31, 2020 with the potential for an extension. UK insurers have until June 15 to formally indicate that they wish to participate in the scheme, which will cover both domestic and overseas trade with payment terms of up to two years.

“Through this landmark agreement the public and private sectors are joining forces to support ‘UK plc’ by maintaining liquidity and confidence in the intercompany trade credit market. This will help our customers through this difficult period, help them to remain competitive, and allow them to take every opportunity to restart trading with confidence as the UK economy emerges from lockdown,” commented Milo Bogaerts, chief executive of Euler Hermes UK and Ireland.

Euler Hermes explained the scheme is expected to cover 90% of B2B trade credit insurance transactions for UK-domiciled businesses. To protect businesses that the private credit market cannot insure, the Treasury noted that export credit insurance is also available from UK Export Finance to cover exports to 180 countries.

The UK’s Trade Credit Reinsurance scheme follows similar state-backed support being developed in Canada and other European countries such as Germany, France and the Netherlands.

“Maintaining cover as far as possible between suppliers and their clients will be a key component in allowing the UK economy to overcome the challenges of the current crisis,” said James Dalton, director of General Insurance Policy at the ABI. The ABI and a number of trade credit insurers have worked closely with the government over the past two months to develop such a facility.

“The guarantees will support supply chains and help businesses during the coronavirus pandemic to trade with confidence, safe in the knowledge that they will be protected if a customer defaults or delays on payment,” said HM Treasury in a statement.

The scheme became necessary because businesses are struggling to pay bills due to the coronavirus crisis, which raised the risk of credit insurance being withdrawn or premiums increasing to unaffordable levels, explained the Treasury.

Trade credit insurance underwrites an estimated £350 billion (US$436 billion) of economic activity of more than 630,000 businesses in the UK each year, said the Treasury.

Maintaining Supply Chain Liquidity

“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,” said Business Secretary of State Alok Sharma.

“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,” Sharma continued.

“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,” commented Adam Marshall, director general of the British Chambers of Commerce.

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