UK Government Announces Support for Trade Credit Insurance: What it Means for Businesses
On 13 May 2020, the UK government announced a new scheme to support struggling businesses. It promised to temporarily guarantee business-to-business transactions currently supported by trade credit insurance — ensuring most insurance coverage will be maintained across the market.
COVID-19 and the resultant lockdowns in the UK and worldwide have dramatically affected businesses' cashflow, particularly those in higher credit risk sectors such as automotive, construction, retail, travel, and tourism. Many economic forecasters believe that the UK is already in recession, with figures from the UK Office of National Statistics showing that the UK economy is contracting at the fastest pace since the 2008 financial crisis.
Given these unprecedented circumstances, insurers are reviewing the risk they underwrite in the UK to reduce the impact of increased insolvencies.
The support package announced by the UK government aims to guarantee against these risks, allowing insurers to maintain consistency in credit limits offered to policyholders, so that supply chains remain lubricated and cashflow problems are minimised.
It is hoped that the government scheme will "flatten the curve" of avoidable insolvencies and their possible negative impact on the UK economic recovery.
What Is Trade Credit Insurance?
Trade credit insurance helps businesses transfer and manage the risk of their customers being unable to pay debts accrued for goods or services supplied and invoiced for future payment. Without a line of credit, their customers would need to find cash they don’t have, causing financial distress or failure.
Insurers usually cover companies via an annual policy, with specific limits for their customers based on the maximum value they are likely to owe at any time during the year. This allows companies to transfer the risk of default to an insurer, and claims can be made in the event of customer insolvency or default. Trade credit insurance can also help companies monitor their debtors’ changing risk profile, as insurers constantly assess the financial viability and probability of default.
Insurers may reduce or remove specific limits during the life of a policy when a company's risk profile deteriorates, although policyholders are covered for sales already made while covered, or for contractual commitments for continued trade for a defined period.
Full details of how the scheme will operate have not yet been released, but we will closely monitor the situation and provide an update in due course.
In the interim, trade credit policyholders should take the following steps:
- Ensure you are familiar with your responsibilities under your specific policy.
- Ensure you adhere to your policy terms and conditions to not jeopardise your cover.
- Consult your usual Marsh JLT Specialty contacts if presented with a challenging situation so they can help guide you through the next steps in the process.
This new scheme is a positive step to support businesses as they recover from COVID-19's impact. Marsh JLT Specialty's trade credit team is proud to have worked alongside the insurance industry to help the government understand its critical importance.