In this article:
- What are we doing?
- How does it work?
- Why are we doing this?
- When will this be implemented?
- How is this different to the trade credit insurance support scheme that Government implemented in 2009?
- Insurers haven’t been paying out on business interruption policies, why are we helping them out? / Is this a bailout for insurers?
- Is this the same as the scheme in Germany/France/Denmark…?
- Will the scheme provide support for X,Y,Z…?
- How does this scheme work alongside other government support e.g. CBILS?
- How do I access this scheme?
- How much will this cost?
- What about insurers who are still paying dividends to shareholders? Will they still get Government money?
- Will this reduce insurance premiums for businesses?
- What’s the review referenced in the press release? Is this guarantee a sign that the market isn’t working?
- What about insurers based in the EU/overseas who insure in the UK, will they still get the guarantees. If so, why is that fair?
What are we doing?
The government will be introducing support for businesses who rely on Trade Credit Insurance and who are experiencing difficulties maintaining cover due to the impact of Covid-19. The scheme will provide temporary support to trade credit insurers in the form of a reinsurance arrangement, which will see trade credit insurers continuing to underwrite cover and offer credit limits on the majority of businesses throughout the Covid-19 crisis.
This will ensure that supply chains can continue to function properly and that trade can resume effectively once the current business disruption has ended.
The scheme will sit alongside the Government’s wide range of existing measures to support businesses through the crisis and facilitate economic recovery.
How does it work?
- The scheme will provide temporary support to trade credit insurers in the form of a reinsurance arrangement, to help mitigate the economic impacts of the Covid-19 crisis on trade credit coverage.
- All trade credit insurers operating in the UK will be eligible for support. The guarantees will cover trading by domestic firms and exporting firms and the intent is for agreements to be in place with insurers by end of this month. The guarantee will be temporary and targeted to cover Covid-19 economic challenges, and it will be followed by a review of the TCI market to ensure it can best support businesses in future.
- The government is working with industry to finalise further details of the scheme. It is important to get the details right so that the scheme works for businesses and insurers, and also offers value for money for the taxpayer. It is vital that insurers can maintain their underwriting standards and risk management practices, to ensure that support is offered to businesses that can trade out of the current situation.
Why are we doing this?
- The government recognises that the Covid-19 pandemic has put many businesses into difficulty. Given the sudden disruption to economic activity, and the increased risks of insolvency and default in the market, trade credit insurers may immediately withdraw some of the coverage that they currently offer in order to remain viable. The alternative would be to increase premiums to a degree that is uneconomical for all parties. The withdrawal of cover could cause further difficulties for businesses by placing pressure on liquidity and necessitating changes to payment terms.
- Trade credit insurance plays a particularly significant role in non-service sectors, such as manufacturing and construction, giving businesses the confidence to trade with one another. The Government is keen to ensure that these sectors are not put into further distress as a result of the Covid-19 crisis.
- This scheme will ensure that supply chains continue to be protected from the potential domino effect of trade disruption and business defaults. It will facilitate the UK’s economic recovery by helping businesses to resume trading under their normal terms as soon as possible.
When will this be implemented?
- We recognise businesses’ immediate concerns about changes to their credit insurance cover. The Government is working urgently with industry to finalise the details of the trade credit insurance support scheme, and aims to put it into action by the end of May.
- The guarantee will be backdated to an appropriate point.
How is this different to the trade credit insurance support scheme that Government implemented in 2009?
- Following the 2008/09 financial crisis, the UK Government implemented a trade credit insurance ‘top-up’ scheme in May 2009.
- The scheme allowed policyholders who had seen their credit limits reduced to purchase top-up insurance policies to restore their cover to its original level. These policies were administered by insurers on behalf of the Government. Policyholders who had seen their coverage fully withdrawn were not eligible for support.
- The Government set aside £5 billion of support for the top-up scheme, of which around £18 million was taken up.
- The Government has learnt lessons from the administration of the 2009 top-up scheme. The new scheme will take the form of a broad reinsurance agreement between HMG and insurers rather than applicable to individual policies, so will be quicker and simpler to implement than the top-up scheme. The scheme will also support a wider range of policyholders, including exporters and those who may have seen their cover fully withdrawn.
Insurers haven’t been paying out on business interruption policies, why are we helping them out? / Is this a bailout for insurers?
- This scheme is not a bailout for insurers. It is designed to allow as many UK businesses as possible to continue to access trade credit insurance throughout this period of economic disruption.
- The Government’s priority for this scheme is work with insurers to support UK businesses. Money from the guarantee will be paid out to businesses who have been affected by their buyers’ non-payment, and the scheme will be designed so as to not allow insurers to use this Government support to profit from the current situation.
- [Trade credit insurance is a specific product, and is generally provided by different firms to those offering business interruption policies.]
Is this the same as the scheme in Germany/France/Denmark…?
- Several European countries have already implemented schemes to support their trade credit insurance markets, including Germany, France, Denmark, Belgium and the Netherlands.
- The final scheme is likely to share similarities with some of the other interventions launched across the continent. However, the details are still being finalised by the UK Government and being discussed with insurers. Further detail will be announced in due course.
Will the scheme provide support for X,Y,Z…?
- The government is working with industry to finalise the details of the scheme. It is important to get the details right so that the scheme works for the majority of businesses and also offers value for money for the taxpayer. Further details will be announced in due course.
How does this scheme work alongside other government support e.g. CBILS?
- This scheme will form a further part of the Government’s timely, targeted and temporary package of business support measures. Together, these measures will provide assistance to businesses throughout the Covid-19 crisis.
- This scheme will not affect UK businesses’ eligibility for other business support measures.
How do I access this scheme?
- Businesses do not need to apply directly to this scheme, as support will be administered directly between the Government and trade credit insurers.
How much will this cost?
- The government is working with industry to finalise the details of the scheme, including the overall size of the Government guarantee. We will set the guarantee at an appropriate level to cover losses and provide meaningful support to the market. Further details will be announced in due course.
- In 2018 gross trade credit insurance claims were £301million. We would expect claims over the next 12 months to be substantially higher because of the impact of Covid-19.
What about insurers who are still paying dividends to shareholders? Will they still get Government money?
- The Government is working with industry to finalise the terms and conditions of the scheme. The Government’s priority for this scheme is to work with insurers to support UK businesses.
- Further details of the scheme will be announced in due course.
- It is the Government’s intention that this scheme will allow the trade credit market to operate as normal, as far as possible. This includes the premiums charged for trade credit insurance policies.
- Further details of the scheme will be announced in due course.
What’s the review referenced in the press release? Is this guarantee a sign that the market isn’t working?
- The Government’s priority for this scheme is to support UK businesses that could be affected by the withdrawal of trade credit insurance cover during the Covid-19 crisis.
- In the longer term, it will be appropriate to evaluate the effectiveness of this intervention, assess how the market responded to economic disruption, and consider how it can continue to best serve businesses.
What about insurers based in the EU/overseas who insure in the UK, will they still get the guarantees. If so, why is that fair?
- The guarantee will support UK businesses and only claims made on policies held by UK businesses will be covered by the Government guarantee.
- While the largest operators in the market are overseas firms, this is not a bailout for insurers. We are working with the insurers to best support British businesses.
What is Trade Credit Insurance?
- Trade credit insurance provides protection for businesses when customers do not pay their debts owed for products or services. The policy will reimburse the policyholder in the event of the buyer’s non-payment, up to a certain credit limit set by the insurer. This form of insurance can prevent the negative impact of non-payment from having a ‘domino effect’ along supply chains.
- Currently, there are around 13,000 trade credit insurance policyholders in the UK. Across the economy, these policies provide credit limits for transactions with over 600,000 buyers. A large proportion of these buyers are SMEs.
- In 2018, trade credit insurance provided cover for £356bn of UK business transactions.
- In 2018, £456m was paid in trade credit insurance premiums, and trade credit insurers paid out £301m in gross claims.
- 40% of insured SMEs use trade credit insurance to access bank financing.
- As part of the trade credit insurance policy, insurers actively monitor the creditworthiness of buyers covered by the policy. The insurer can adjust or withdraw credit limits based on this monitoring.
- Due to the significant business disruption caused by Covid-19, trade credit insurers may immediately withdraw significant amounts of coverage due to the increased risk of buyer non-payment.
- If trade credit insurance is withdrawn, suppliers may have to request that their customers pay for goods in advance or at the time of delivery. This could exacerbate the economic impacts of the pandemic by causing issues for liquidity and working capital for buyers and damaging trust in supply chains.