The formal backing by the UK Government of trade credit insurance is certainly great news for clients of The Channel Partnership. We’ve been looking at the detail and while the £10 billion in Government support will relieve some of the pain brought by the COVID-19 crisis, it’s something of a bitter pill for the insurers.
[To see an updated article on this story, click here]The Trade Credit Reinsurance scheme is intended to support UK companies trading on credit terms. It is aimed at encouraging the economy to bounce back from the pandemic-enforced lockdown – which threatens to leave businesses massively out of pocket. It certainly recognises the critical role that credit insurance must play in reviving the UK economy.
The lockdown is expected to cause a huge rise in the level of corporate insolvencies with credit insurance claims forecast to rise by 200% to 400% during H2 2020. Bear in mind claims are already at a high level.
The Government’s guarantee to UK credit insurers should give UK companies the confidence to provide goods and services on credit terms, despite the increased risk of non-payment. It covers domestic and export trade and is available to any UK-based company with a credit insurance policy in place and – this is important – only where the credit insurer has agreed to sign up to the scheme. It is not a blanket guarantee.
The Channel Partnership works with all of the UK’s leading credit insurance providers so we can advise on this.
The Government support comes at a high price for the credit insurers.
• 90% of premiums are to be handed over to the UK Government.
• No participating credit insurer is allowed to make a profit, to pay a dividend or to pay any bonuses while the scheme is in place.
• Participating credit insurers have to retain their current pricing models. The Government expects premiums to reflect the risk that the government is underwriting.
What is clear to us is that any participating credit insurer will definitely make a loss by signing up for this scheme. Even then, this provides a greater degree of certainty to them – a known loss rather than a potentially catastrophic loss.
This is a temporary scheme – currently running until 31st December 2020, though it will be reviewed in September and may be extended.
We believe this is a massively positive move for our clients, and are monitoring the situation closely.
There will be more detail to follow from us, as we hear which insurers sign up for the scheme and how we can best help our clients take maximum advantage.