Coronavirus: Ministers finalise reinsurance scheme to rescue supply chains
Government officials and industry executives are close to finalising a scheme to aid trade credit insurers, Sky News learns.
Monday 11 May 2020 14:14, UK
Ministers are finalising a multibillion pound plan to prop up industry supply chains amid fears that the withdrawal of cover during the coronavirus pandemic would intensify the UK's economic downturn.
Sky News has learnt that Whitehall officials and senior figures from the insurance industry could finalise a scheme within days to provide a taxpayer-funded guarantee to trade credit insurance contracts for the duration of the COVID-19 crisis and its immediate aftermath.
An executive at one trade credit insurer said a deal could be struck as soon as the middle of this week, although they cautioned that the details could yet take significantly longer to conclude.
The industry has proposed a reinsurance scheme, under which the government would share with insurers the risk of providing cover to supply chains, according to insiders.
A sudden spike in insolvencies arising from the coronavirus outbreak would exacerbate the risk of such insurance contracts being pulled.
Trade credit insurers offer crucial protection to companies against the risk that customers will not pay for goods.
Without it, suppliers often demand payment for goods upfront, exacerbating the strain on an already struggling company's cashflow.
The big players in the trade credit insurance sector, which include Atradius, Coface and Euler Hermes, therefore play a critical role in sectors that they help to finance, such as manufacturing and retail.
Industry sources said the Treasury and Department for Business, Energy and Industrial Strategy (BEIS) were in close co-operation about a reinsurance scheme.
Business Secretary Alok Sharma has held a series of talks with insurers to hammer out an agreement.
The Financial Conduct Authority and Prudential Regulation Authority are also understood to be involved in the discussions.
The trade credit insurance executive estimated that any government guarantee would add billions of pounds to the cost of the various emergency support packages announced since March.
A reinsurance scheme would be similar to those adopted in other European countries, including Germany, in recent weeks.
Such a model has been recommended by the industry on the basis that it would be more effective than a top-up scheme used by the government during the 2008 banking crisis.
The Treasury declined to comment on Monday, while a spokesman for the Association of British Insurers referred to a previous statement, which said: "Businesses that buy trade credit insurance are protecting themselves against firms they do business with becoming insolvent and not being able to pay their bills.
It added that insurers last year paid out £315m to help firms cope with bad debts.
"Insurers work closely with their customers, discussing with them where credit limits can be adjusted to help avoid bad debts, but this cannot happen where there is likely to be a sharp rise in insolvencies across many business sectors, such as from COVID-19," the ABI added.
This meant, the ABI added, that the availability of trade credit insurance "is likely to be severely reduced in the future".
"We want to avoid this, so we are discussing with the Government the scope for temporary state support to ensure that businesses can continue to obtain cover that meets their needs.
"Many European governments are discussing with trade credit insurers how to support firms and maintain the supply chain and we have proposed a reinsurance scheme.
"This would see insurers continuing to offer cover, with limited reduction in credit limits to customers, with the government acting as a reinsurer of last resort."