The European Union's executive arm has given the green light to the plan to cover trade credit insurance, a type of policy that protects companies from losing out if customers who still owe money for products and services cannot pay off their debts.
"Given the prolonged economic impact of the coronavirus outbreak, the risk of insurers not being willing to maintain their insurance coverage has become higher," the commission said. "The scheme aims at ensuring that trade credit insurance will continue 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."
Under EU rules, the executive can sign off state aid measures implemented by countries in the bloc to remedy a "serious disturbance to their economy."
The scheme is intended to supplement private insurance, the commission said. Private insurers will be able to choose a coverage of public re-insurance guarantee of up to 60%. Risk and premia are then shared pro-rata between the state and the private insurers, the EU added.
Demand for trade credit insurance is expected to shoot up in the aftermath of the COVID-19 pandemic, as more and more bills may go unpaid.
State-backed programs have helped curb pandemic-linked losses for insurers who provide trade credit cover, according to ratings agency Fitch. The agency said in August that governments have quickly recognized the importance of trade credit insurance during an economic downturn. Many businesses rely on such company-to-company credit as their main source of funding.
The state support schemes include so-called proportional reinsurance treaties, such as in Germany, where the government takes 65% of the premium, and also covers 90% of claims.
There are also instances where some countries are putting forward supplementary cover over what is provided by the insurer.
Britain is among the countries that have offered pandemic-related support to the sector. It announced in June that it was setting up a £10 billion trade credit insurance fund to protect companies.
The scheme was approved by the European Commission in July, which found that the program would help enable trade credit insurers to maintain the pre-COVID-19 level of protection they offered businesses.
"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 at the time.
--Additional reporting by Najiyya Budaly. Editing by Alyssa Miller.
For a reprint of this article, please contact reprints@law360.com.