VIEW: Trade credit weaknesses remain despite government scheme

The recent extension of the UK government's trade credit reinsurance scheme was not an unexpected development, given the tough trading environment for businesses during the pandemic period of 2020-2021. The six month extension to 30th June 2021, along with other UK Treasury initiatives, sends a strong message of support to protect business and position them for post COVID-19 recovery.

This is because the government guarantee has helped to enabled the continuation of trade credit insurance coverage during the ongoing pandemic period and its resultant economic downturn, providing continuity of protection, with insurance capacity which otherwise might not have been made available by carriers or else been rendered unaffordable due to rate rises at renewals.

The scheme has helped to avoid systemic risk during a period of relative uncertainty for so many UK businesses, by allowing UK businesses to continue to trade and transact with each other with greater confidence, as businesses continue to grapple with contractual and supply chain risks related to the ongoing pandemic.

For many businesses the scheme itself has made little difference to their covers. While this continuity has been the central aim of the scheme, its focus on capacity, rather than risk appetite or the suitability of products available, means that many buyers are still underwhelmed by the products and services that the market offers. The scheme does not address these issues.

For example, trade credit products are too often unsuited to transacting cross-border business, so that some buyers still cannot contract in a manner that meets policy terms. That will be particularly relevant given the logistical difficulties to international supply chains felt as a result of coronavirus rules as well as some of the legal and regulatory changes relating to Brexit.

Additionally, a lack of industry collaboration means that inconsistent data and notification requirements between carriers results in inefficiency for policyholders, rather than a more streamlined process, putting an additional burden on insureds working with multiple carriers, which in many cases reduces the trade credit product’s value proposition.

Given the experience of the scheme’s initial period, the market should more fully embrace the intent of the government’s reinsurance guarantee to maintain and, where relevant, bolster credit risk appetite, rather than use the current economic challenges as an opportunity to fundamentally de-risk and re-position portfolios, as well as to reconsider how to improve the efficiency and design of its products, to further increase the value proposition.

While there are occasions when government should be more effective as the insurer of last resort, taking on risk that the private sector is unable or unwilling to bear, this should not be an automatic process. The market should step up more often as insurer of first resort than it typically does, if it wishes to remain relevant.

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