EU Approves UK Plan For €11B Trade-Credit Insurance Fund

By Najiyya Budaly
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Law360, London (July 28, 2020, 4:47 PM BST) -- The European Commission on Tuesday approved U.K. plans for €11 billion ($14 billion) in state aid to fund trade-credit insurance cover for businesses facing the risk that their clients will not be able to pay for goods during the COVID-19 crisis.

The EU executive approved Britain's guarantee scheme to support the trade credit insurance market under the bloc's state aid rules. The insurance product covers companies that supply goods and services against the risk that customers will be unable to pay outstanding invoices.

The economic fallout from the coronavirus pandemic has meant the insurance sector has been less willing to cover businesses under trade credit policies. Claims typically rise when there are widespread insolvencies.

"The U.K. scheme ensures that trade credit insurance continues to be available to all companies, avoiding the need for buyers of goods or services to pay in advance, therefore reducing their immediate liquidity needs," the commission said Tuesday.

The commission has approved a maximum of €11 billion to help British insurers provide the cover to U.K. businesses. Under EU rules, the executive can sign off state aid measures implemented by member states to remedy a "serious disturbance to their economy."

The commission said it found that the scheme proposed by the U.K. government will help to ensure that trade credit insurers in Britain will maintain the level of protection that they offered to businesses before the coronavirus outbreak.

The scheme is open to all trade credit insurers in the U.K. until the end of the year, the commission said.

The U.K. government has been working to revive the sector during the crisis. It put in place a trade credit backstop in June in order to limit the risk of insurers withdrawing from the trade credit insurance market or hiking premiums.

The backstop means that the government effectively pays 90% of trade credit claims, with insurers picking up the tab for the remaining 10% of losses.

Investment bank UBS said at the end of April that global losses from trade credit insurance could reach $16 billion, with government backstops limiting further losses. But Morgan Stanley has put the potential losses much higher, saying that global trade credit insurance losses could balloon to $46 billion over the next two years as a result of the pandemic.

--Additional reporting by Martin Croucher. Editing by Alyssa Miller.

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