Exploring the trade credit insurance landscape post-Covid – ABI

In March 2020, as the UK went into its first national lockdown as a result of the Covid-19 pandemic taking hold, many trade credit insurers forecasted an avalanche of defaults and insolvencies, which would in turn trigger claims.

Despite this prediction from the ABI’s Trade Credit Committee, as well as other trade credit insurers, in April and May 2021, the UK was still in a “record low period for insolvencies and claims payments”, according to Simon Philpin, head of global business development for trade credit at Markel International and chairman of the ABI’s Trade Credit Committee.

Trade credit insurance provides cover for businesses if customers who owe money for products or services do not pay their debts, or pay them later than the payment terms dictate. 

Philpin, who replaced Euler Hermes’ Milo Bogaert to chair the ABI’s Trade Credit Committee in August 2020, told Insurance Times: “So, why did the insolvencies not materialise? Well, who’s to say they won’t?

”While our industry worked with [the] government and responded swiftly [to the pandemic], the government also introduced other support mechanisms, such as furlough, loans for businesses, relaxation in insolvency laws and tax deferrals.

“We are now in a period where all support packages are coming to an end - we wait to see the fallout, if any. Although we are expecting insolvencies to increase, this is from a record low and the initial avalanche of insolvencies appears to no longer be a concern – for now at least.”

New research from trade credit insurer Atradius supports Philpin’s view that insolvencies could be on the up in the UK. Its annual Payment Practices Barometer Survey Results for Western Europe, published in November 2021, found that in the UK, 44% of the total value of B2B sales were reported as overdue this year, with 8% written off.

Andreas Tesch, Atradius’ chief market officer, explained: “Businesses have already weathered the pandemic driven downturn, but there are signs that next year could be even more challenging.

”On a global level, we are expecting to see insolvencies increase by about 33%. In Western Europe specifically, estimates point to an uptick in business failures in Italy and the UK of 34% and 33% respectively. Businesses should take note of the heightened risk environment and take steps to protect their accounts receivable.”

Learning from the past

During the global financial crisis in 2008 and 2009, the trade credit insurance industry anticipated a significant increase in claims because many corporates were struggling for liquidity when the banking industry was trying to resize balance sheets by reducing banking lines, Philpin explained.

“As a way of steering insureds away from losses, a large portion of the trade credit insurance industry operates on a cancellable cover basis, which meant a large portion of insurance was withdrawn over a period of two to three months,” Philpin said.

“This resulted in some brokers and insureds having their insurance withdrawn, which potentially hit their liquidity - especially if their policies were backed by finance lines.

”Although a facility was put in place to assist, it was not fit for purpose and was only used if the underlying insurer was still supporting with a credit limit, which - in most instances - was not the case.”

Fast-forward 12 years and both the insurance industry and UK government have learned from these past lessons.

Regarding the Covid-19 pandemic, Philpin said: “We started seeing a very large amount of claims notifications begin to materialise from mid-March 2020. Luckily most of these were recovered before or after indemnification, but the trend was quite scary - it was not just our forecasts.

”These non-payment notices only started to subside from May [and] June [2020]. Without waiting for any government guidance, we all worked towards accommodating the needs of our clients - for instance when they suggested rescheduling some of the debt of their customers.”

In Q4 2020, many economists and industry commentators were still expecting insolvencies, but as time went by, the timeframe of when this would come into fruition kept getting pushed over into the next quarter, Philpin added.

He continued: “At the time, most insurers had started to write new business enquiries very competitively. The rationale for this is that while most insurers received very little claims in 2020, the majority of insurers would not have underwritten new business for a period of six to eight months, which would have resulted in small growth – if any - and missed return targets for shareholders.”

Partnering with the government

Meanwhile, the UK government moved in to offer additional support during the pandemic by creating a trade credit reinsurance facility called the Trade Credit Reinsurance Scheme.

The terms and conditions of the facility were agreed in June 2020, backdated to 1 April 2020. The facility was initially expected to end on 31 December 2020, but was extended until June 2021.

According to Philpin, this scheme - together with wider industry efforts and utilising the lessons learned from the global financial crisis - enabled the ABI and its members to perform better than expected during a truly unprecedented period

Philpin described the scheme as a “huge success” for all involved, especially in keeping trade lines open during a period of uncertainty.

“The initial government input of £10bn will be paid back 20 fold by insurers and so it will be a worthwhile and rewarding piece of support and collaboration,” he said.

“The ABI and trade credit insurers worked closely and constructively with the UK government on the temporary scheme that helped ensure that businesses remained able to insure against potential risks in the supply chain.

“The scheme has been an excellent example of how [the] government and the industry can work together on solutions to unprecedented market challenges to ensure the continued availability of insurance.” 

Although little new trade credit business was written in 2020, the government’s reinsurance scheme has additionally helped bolster the sector’s risk appetite, Philpin noted.

He said: ”All insurers that participated in the scheme were passing through all premium less costs to the UK government, therefore, it was no surprise to see an increase in risk appetite moving into 2021 because insurers knew the scheme would eventually fall away, which it did in June this year.”

Offering ‘stability’ for a ‘rough environment’

Looking ahead to 2022, Philpin and the rest of the Trade Credit Committee have been looking at how to best work with the ABI “to use every opportunity to reinforce the message that trade credit is here to help support business and the economy”.

Philpin continued: “We have had a great working relationship with government during the pandemic and we’ll build on that because ultimately, we’re here to support UK PLC. We give the UK’s critical mid-tier companies, often the last major employers in a town, the confidence to keep distribution and service lines open. Our supply chain intelligence puts a finger on the pulse of entire sectors. It’s powerful stuff.

“Overall, in 2022 we’ll be here doing what we always do - stimulating business cashflow and bringing a level of stability in what could be a rough environment for many of our customers.”