Gov't Ends £210B Trade Credit Insurance Backstop

By Martin Croucher
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Law360, London (May 27, 2021, 12:56 PM BST) -- The government has said it will end a trade credit backstop that has provided £210 billion ($300 billion) of insurance to businesses in Britain during the COVID-19 pandemic against the risk of widespread insolvencies.

HM Treasury said on Wednesday that it has agreed with the Association of British Insurers, the sector's trade body, to end the reinsurance scheme on June 30. 

The backstop has allowed the government to pay 90% of trade credit claims, with insurers picking up the tab for the remaining 10% of losses. The scheme was launched in June 2020 to limit the risk that insurers would withdraw from the trade credit insurance market or hike premiums. The insurance provides cover for supplier businesses against the risk that a buyer will default on payment. Claims typically rise when there are widespread insolvencies.

The government said insurers are "keen to take back full underwriting control" and that the sector had made it clear that the backdrop was no longer required.

"The scheme allowed trade to continue flowing despite the uncertainty caused by the pandemic, and it is only right that, now our economic outlook has improved and businesses are getting back on their feet, the private sector resumes its role of providing insurance cover," Paul Scully, the business minister, said.

According to the government's Budget statement on March 3, around £50 billion of insurance cover to approximately 155,000 businesses would have been withdrawn by the sector if the Treasury had not intervened in the market.

The backstop was launched to cover up to a total of £10 billion in insurance claims. A spokesperson for the Treasury did not immediately respond to a request for comment about how much has been paid out in claims.

A report by the Office for Budget Responsibility — which provides independent economic forecasts and independent analysis of the public finances — in July last year estimated that potential claims under the scheme could reach £1.7 billion, based on estimates from the last financial crisis. Updated figures were not available.

Fears that the pandemic could trigger a wave of insolvencies have not been borne out by the numbers. Insolvency practitioner Begbies Traynor said in January that the rate of corporate failures fell by 31% in the last three months of 2020 compared with the same period a year earlier.

Begbies warned at the time that government loans and furlough payments had kept distressed businesses on "artificial life support," with regulators warning of an uncertain outlook when government support ends in September.

--Editing by Joe Millis.

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