Trade Credit Reinsurance Scheme

What is the Trade Credit Reinsurance Scheme?

The Trade Credit Reinsurance Scheme, 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. The government has committed to provide a guarantees of up to £10 billion to the Scheme.

The Trade Credit Reinsurance Scheme launched on 4 June 2020 is to be available on a temporary basis for nine months backdated to 1 April 2020 and running to 31 December 2020, with the potential for extension if required.

Why is the Scheme required?

Trade credit insurance underwrites an estimated £350 billion of economic activity of more than 630,000 businesses in the UK each year and protects companies from the risk that their customers become insolvent before paying for goods or services. It is a vital cog in the economy, allowing businesses to trade with each other with confidence.

Without government support insurers may increase insurance premiums significantly or may withdraw cover completely. This would cause serious issues for the liquidity and working capital of many business and severely impact on the wider business supply chains.

Key Features

• The scheme will be delivered through a temporary reinsurance agreement that is open to all 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 rules of the Scheme will require participating insurers to comply with certain undertakings regarding the conduct of their business during the period of the scheme; they will not be allowed to make profits on businesses that uses the guarantee, and their senior staff will not be paid dividends or bonuses for their guaranteed Trade Credit Insurance business.

What about export credit insurance?

To protect businesses that the private credit market cannot insure, export credit insurance is also available from UK Export Finance to cover UK exports to 180 countries. UK Export Finance (UKEF) is an established UK government department whose purpose is to grow UK exports. They do this by providing insurance to exporters (Credit Insurance and bond insurance), guarantees to banks to support funding lines for UK exporters and lending directly to companies e.g. to overseas buyers of UK goods. Over 230,000 businesses export from the UK and Government-backed export insurance from UKEF can protect against the risk of not being paid when selling internationally.

Our Comments:

Whilst the Trade Credit Reinsurance Scheme is subject to State Aid approval, agreement of full form documentation with insurers and acceptance of applications from insurers for participation its establishment will be another key aspect of the support that government has been required to provide to businesses as a result of coronavirus (COVID-19) to ensure the liquidity and viability of businesses in certain sectors of the UK economy.

This article has been produced for general information purposes and further advice should be sought from a professional advisor. Please contact our Banking & Finance team at Cleaver Fulton for further advice or information.