On 4 June, the UK Government announced that 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, led by the Department for Business, Energy and Industrial Strategy, will temporarily reinsure the credit risks of business-to-business transactions covered by Trade Credit Insurance in the UK.
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.
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. Under this scheme insurers will take 10% of claims that result from business failure while government will take 90% of the premium and claims.
This sharing of risk will allow insurers to provide wider cover to UK businesses affected by the Covid-19 crisis, and to aid companies to resume trading, knowing that they are protected from the failure of trading partners to pay for goods and services supplied. UK businesses covered by trade credit insurance will be included automatically in the scheme if their insurer participates in it. They should consequently find it easier to access cover in the market that would otherwise have been difficult to provide.
Insurers will have until 15 June to formally indicate that they wish to participate in the scheme, which will be backdated to 1 April. The scheme will run until 31 December 2020, with a review on potentially extending it taking place at the end of September.
The key parameters of the scheme are:
- The scheme is delivered through a temporary reinsurance agreement with insurers currently operating in the UK market, covering both domestic and overseas trade with payment terms of up to 2 years.
- The Government will reinsure 90% of insurance claims up to a cap of £3bn and 100% of claims between £3bn and £10bn.
- The Government will receive 90% of gross policy premiums and return 35% of these premiums to insurers to cover their costs.
The scheme rules will require participating insurers to comply with certain undertakings regarding the conduct of their business during the period of the scheme. This includes conditions that they will forgo profits and not pay dividends or bonuses for senior staff for their guaranteed Trade Credit Insurance business.
The scheme will be followed by a joint BEIS & HMT-led review of the Trade Credit Insurance market to ensure it can continue to support businesses in future.
techUK welcomes the Government's announcement of a temporary, government-backed reinsurance scheme to help businesses access trade credit insurance as they recover from the impacts of COVID-19. The launch of a government-backed guarantee will help ensure that this channel remains available to businesses during and after this crisis, helping to maintain supply chains and trade.