As the Government has announced the new five stage COVID-19 alert system and we all consider what this means for the levels of social distancing and lockdown measures to observe, it is clear that COVID-19 pressure continues to mount on the insurance industry.
On 13 May 2020, HM Treasury has announced the Government will temporarily guarantee business-to-business transactions currently supported by Trade Credit Insurance (TCI), ensuring the majority of insurance coverage will be maintained across the market.
The guarantee will be delivered through a temporary reinsurance agreement with insurers currently operating in the TCI market. The Government says it will work with businesses and the industry on the full details of the scheme to ensure firms are supported and risk is appropriately shared between the government and insurers. The guarantees will cover trading by domestic firms and exporting firms and it is hoped the relevant agreement will be in place by end of this month.
TCI provides cover to hundreds of thousands of business-to-business transactions, particularly in sectors such as manufacturing and construction. It is seen as a vital facilitator of trade as companies pass the risk of payment defaults to insurers. Ordinarily if a buyer's credit risk increases, the insurer may reduce or remove the credit limit it permits its insured to offer to that buyer. Insureds' often have a duty under a trade credit policy to monitor the financial health of their buyers and to notify the insurer of any adverse changes. Insurers may then reduce or cut limits on that buyer. The reduction or removal of credit limits has an impact on trade as it prevents insured companies selling goods with the comfort of insurance underpinning that trade in the event of default.
The current crisis will be impacting most companies around the world and, as a result, insurers will already be on risk for sold but not paid for goods. Insurers will be looking to reduce their exposure by cutting the credit limits. The problem is that as COVID-19 will affect many companies, there could be a widespread reduction of credit limits by insurers which stifles trade.
In order to maintain the flow of trade, HM Treasury seems to be willing to take the risk on some of those defaults going forward in return for TCI firms keeping credit limits open. The details of the arrangement are still to be negotiated. However, it appears the Government is trying to assist the TCI market's ability to keep credit limits up where usually they would reduce them to reduce the exposure to defaults.
The Government appears to be in constant dialogue with the insurance industry and it remains to be seen whether any further initiatives in other corners of the insurance industry will be implemented.
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