Airmic urges insurers to improve underwhelming solutions in wake of trade credit scheme extension

Airmic has welcomed the extension of the UK’s government-backed trade credit reinsurance scheme, but told CRE that many buyers remain “underwhelmed” by the products on offer from the market and urged insurers to fully embrace the intent of the state guarantee to bolster risk appetite and develop better solutions, rather than de-risk portfolios.

The UK has followed moves by other European governments and extended its trade credit insurance backstop for a further six months as the Covid-19 pandemic continues.

The £10bn Trade Credit Reinsurance Scheme was first launched in June 2020 and guarantees trade credit insurance to support the market, businesses and supply chains disrupted by the pandemic.

Under the scheme, the UK government took on 90% of claims and premium income, while insurers retained 10% of trade credit claims. The backstop mitigates against higher premiums or withdrawal of cover.

It was due to expire at the end of 2020 but has been extended until 30 June, in the same week that the UK entered another strict lockdown as Covid-19 cases and deaths continue to rise alarmingly in the country.

John Ludlow, CEO of UK risk and insurance management association Airmic, welcomed the extension on behalf of members.

He said the extension is not unexpected, given the current trading environment for businesses. But in conjunction with other UK Treasury financial and liquidity initiatives, the move sends a “strong” message of support to protect businesses and position them for post-Covid-19 recovery, Mr Ludlow told Commercial Risk Europe.

“The government’s guarantee has enabled the continuation of trade credit insurance coverage during the ongoing pandemic period and its resultant economic downturn, providing continuity of capacity that otherwise might have been made unavailable by carriers or else made unaffordable at renewals,” he said.

Adding: “The scheme has helped avoid systemic risk during a period of relative uncertainty, 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.”

But Airmic’s deputy CEO and technical director Julia Graham said that while the scheme has ensured continuity of existing trade credit cover for UK firms, it has failed to address what many perceive as shortcomings in the solutions on offer.

“For many businesses, the scheme itself will have 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,” she said.

“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. Additionally, 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 turn reduces the product’s value proposition,” Ms Graham, explained to CRE.

Instead of using the scheme and current economic conditions to simply de-risk portfolios, Airmic has called on trade credit insurers to take the opportunity to address buyers’ concerns and improve options.

“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 reposition portfolios, as well as to reconsider how to improve the efficiency and design of its products, to further increase the value proposition,” said Ms Graham.

The UK’s trade credit scheme covers all nine major UK trade credit insurers, which insure about 90% of trade credit. These insurers are: AIG UK, Atradius UK, Coface UK, Credendo, Euler Hermes UK, Markel International Insurance Company, Nexus Trade Credit, QBE UK and QBE Europe SA/NV, and Zurich Insurance.

The scheme’s extension has been welcomed by the Association of British Insurers (ABI) and trade credit insurers.

“Maintaining trade credit insurance cover between suppliers and their clients is a key component in enabling the UK economy to overcome some of the challenges arising from the pandemic. We’re pleased to have been able to help the government agree an extension to the scheme, meaning UK businesses can continue to benefit from a greater level of protection from trade credit cover than might have otherwise been possible,” said the ABI’s senior policy adviser for general insurance, Graham Walsh.

Major UK trade credit insurer Atradius said: “Maintaining trade credit insurance cover for UK businesses is key to enabling trade and protecting supply chains. Trade credit protection is also important for the UK economy and its ability to overcome the challenges arising from the pandemic.”

Spain, Belgium, Germany, Denmark and France have also provided a backstop or state guarantee to support trade credit insurance throughout the pandemic.

In December, the European Commission approved Spain’s €500m state-backed reinsurance scheme, while Germany and Belgium also extended their national schemes to June 2021.