A Tricky Time for Trade Credit Insurance Companies

A Tricky Time for Trade Credit Insurance Companies | Griffiths & Armour

Griffiths & Armour’s strategic partners for placing Trade Credit Insurance, Atlas Risk Management Limited have reported that the COVID-19 outbreak has brought a great deal of pressure on the UK credit insurance market.

Prior to the COVID outbreak the outlook for certain sectors of the UK economy was poor, with a great deal of uncertainty surrounding Brexit-affected sectors such as Construction, Automotive and Engineering. Since the COVID outbreak nearly all sectors have faced a demand shock, as whole nations have been in differing levels of lockdown. The UK Retail and Casual Dining sectors have particularly suffered, as footfall simply fell off a cliff!

Credit insurance companies who try to protect their policyholders from unforeseen bad debts are finding it increasingly difficult to gain up to date financial information upon which to base an underwriting decision. If they feel they can no longer maintain insured limits, we could see an unwanted and untimely tightening of the Nation’s liquidity.

Hence on the 4th June 2020 the UK Government made the following announcement:

Trade Credit Insurance, which provides essential cover to hundreds of thousands of business-to-business transactions, will receive up to £10 billion of government guarantees.

The Trade Credit Reinsurance scheme, which has been agreed following extensive discussions with the insurance sector, will see the vast majority of Trade Credit Insurance coverage maintained across the UK.

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.

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 said:

“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 is available on a temporary basis for nine months, backdated to 1 April 2020, and running until 31 December 2020, with the potential for extension if required.

Trade Credit Insurance underwrites an estimated £350 billion of sales relating to 630,000 businesses in the UK each year. The policies insure suppliers against the risk on non-payment, protecting liquidity and giving businesses the confidence to extend credit which oils the wheels of business and will be crucial to the UK economy as it pulls out of the COVID-19 Lockdown.

Due to coronavirus, businesses are struggling to pay bills and there is a risk of credit insurance being withdrawn or premiums increasing to unaffordable levels, which could cause serious issues for liquidity and working capital across business supply chains. The scheme will be delivered through a reinsurance agreement that is open to all insurers currently operating in the UK market, covering both domestic and overseas trade with payment terms of up to 2 years.

The scheme rules will also require participating insurers to comply with certain undertakings regarding the conduct of their business during the period of the scheme. This includes conditions that insurers will forgo profits and will not pay dividends or bonuses for senior staff for their guaranteed Trade Credit Insurance business.

If you would like any guidance or advice surrounding the issues of credit insurance and the Government Scheme, please do not hesitate to contact your Griffiths & Armour broker who will be happy to assist and offer guidance. Alternatively, you can submit your enquiry by clicking below.