We spoke to Milo Bogaerts, CEO at Euler Hermes UK and Chair of the ABI Trade Credit Committee, and asked him a few questions about the UK Trade Credit Support Scheme, the future of trade credit and the role of public-private partnerships within the industry.
How did the Scheme come about?
In early March, the trade credit insurance (TCI) industry identified the potential impact Covid-19 was going to have on trade and the economy. As a result, the industry convened to discuss how best it could continue to support trade and the economy. TCI plays a pivotal role in creating trust and supporting business, and a number of sectors rely heavily on supplying and buying on credit. The industry knew that it could help the Government to support the economy using TCI as an instrument. Following various discussions and good conversations with HM Treasury and the Department for Business, Energy and Industrial Strategy (BEIS) to explain the role TCI plays in trade, the negotiating team of the ABI Trade Credit Committee and HM Government, came to the conclusion that a reinsurance scheme would be the best solution to the challenges faced. The first draft was finalised in early June, but discussions with the European Commission prolonged the final signing to early September.
Why was the Scheme created?
The scheme was created to support the economy by helping the trade credit insurance industry to maintain cover on buyers impacted by Covid-19. The whole industry covers about £100 billion of exposure on UK buyers, representing £200 billion of turnover. If you include export into these numbers, the industry covers about £170 billion of exposure and £350 billion of turnover, respectively. If no support had been given by the Government, the industry would not have been able to maintain cover at the current levels, creating a big strain on the economy. No cover from TCI could have led to difficulties for companies to trade on credit and with that impacting the buying power of their customers.
What was the biggest challenge during the advocacy and negotiation processes respectively?
Overall, the advocacy and negotiation processes went really well. There was one clear goal for all the parties involved which was supporting the economy using Trade Credit Insurance as an instrument. The key topics that were up for negotiation were coming up with a code of conduct which reflected the expertise of the industry as underwriters and yet would allow the industry to provide cover above and beyond what they would normally provide in these unprecedented times, creating value for money for the UK tax payer, and enabling the UK to remain competitive compared to other countries in the EU. The ABI managed to play a pivotal role in these negotiations keeping the industry and Government focussed on the end goal. The biggest challenge was getting the approval from the European Commission when the negotiations were done. This took some time and also led to some changes in the contract, so patience was the biggest challenge.
How does the Scheme work?
The scheme is set up as a reinsurance contract. The reason behind this is to make sure that there is no disruption in the ordinary course of business of the underwriters, whilst creating comfort to write much more cover than without support. The Government protects the insurers by securing 90% of the claims paid by the insurance companies during the scheme period, as well as the actual costs incurred by the underwriters. In return the insurance companies pay 100% of premium paid by their customers to HM Government.
What are some of the benefits the Scheme has had since its launch, both for insurers and customers?
The main benefit the Scheme has had since its launch was the fact that the industry was able to maintain exposure at pre-Covid levels. This protected a number of buyers from having liquidity issues as they are still able to buy on credit which in turn protected these buyers from becoming insolvent. As a result, the scheme has protected thousands of jobs already. With providing this support policyholders are able to trade securely with their buyers. For the insurers, the biggest benefit is that holding cover is providing trust, which creates a positive brand experience.
How do you see the trade credit insurance market evolving in 2021, in particular with the Scheme coming to an end / continuing; the continued fallout from the pandemic, and the end of the Brexit transition period?
This is a tough question. Whilst we expected the number of insolvencies to increase sharply in 2020, this did not happen. All support given by HM Government has really protected a vast amount of companies during this crisis. At a certain moment in time, government support will be reduced. Some of the companies which have received support will be unlikely to recover and may not survive. We believe that an increasing number of companies will start failing in 2021. At Euler Hermes, we expect the insolvencies to increase by 31% in 2021 if there is a trade agreement with the EU. If, there is not agreement, the insolvencies would increase by even more to 55%. Overall, we expect GDP growth to reach between 2 and 2.5% in 2021 as the cost of Brexit would not be fully compensated for by the expected fiscal stimulus (around 3% to 4% of GDP, mainly focused on infrastructure spending and lowering consumer taxes to reduce the burden of higher import prices post Brexit). These numbers are quite scary, considering all the money our government has put in to save and protect thousands of jobs and businesses. With these numbers in mind, extension of the Trade Credit Support Scheme will be beneficial to the economy no matter if we have a trade deal or not.
The Covid-19 crisis has seen increased debates within the industry about the role of public-private / government-backed reinsurance schemes in protecting society from future pandemics and systemic events. What role do you feel these types of schemes have?
In my opinion, the only reason to have public-private reinsurance schemes in place is when there is a sudden risk or situation which could not have been foreseen and where the industry would have to take drastic measures to protect itself. Where there is no private backing, government should be allowed to step in on a short-term basis. If the risks remain high, the industry should be able to provide the right tools to support their customers in the long run. If the risks are short term (like Covid-19) government should immediately step out of the partnership when the economic effects can be born again with the same exposure and cover as without government support. I am a strong believer in the free play of market forces, and we need to get back to that level as soon as we can.