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.

    Share Story:

Recent Stories

Financial institutions were early adopters of cyber security and insurance. Are they still on top of the game?
Managing huge amounts of sensitive data online makes financial institutions a prime target for hackers. As such, the sector was an early cohort for insurers in creating cyber cover. Since then, the market has evolved almost beyond recognition. It continues to challenge itself to this day, complying with rigorous regulatory demands and implementing avant-garde enhancements to keep abreast of the ever-changing risks. Published June 2021

Manufacturing: An industry at risk amid great technological change
Of the many sectors of business, manufacturing companies are among the most at risk from cyber threats. How has the sector evolved to make it so vulnerable and what does the task of managing cyber exposure in a manufacturing company look like? CIR’s latest podcast with Tokio Marine HCC sought to answer all these questions and more. Published April 2021