A vital insurance backstop

According to media reports, chancellor Rishi Sunak will wait until the autumn before announcing his next significant stimulus package for the UK economy. While many would have welcomed an emergency summer Budget, infrastructure investment at the heart of any announcement will be welcome news for a construction industry reeling from months of lockdown and the preceding uncertainty and economic slowdown caused by Brexit.

Firms who had to close construction sites or workers who were shut out of them will be all too familiar with the lifelines already provided by the government’s unprecedented monetary response since the pandemic began, including the job retention and business interruption loan schemes. Given the scale of previous stimulus announcements, it is perhaps unsurprising that the announcement on 4 June confirming a £10bn safety net through trade credit insurance to support business-to-business trade missed the headlines.

However, this safety net is the first of its kind in the UK and is the result of close co-operation between the Department for Business Energy & Industrial Strategy (BEIS), the Association of British Insurers (ABI) and private trade credit insurers. It enables the insurers to continue to provide extensive cover to their clients, and pursue their mission of securing B2B trade in the face of the unprecedented challenges to supply chains posed by covid-19.

For the construction sector this helps to minimise the impact when trading on open credit and maintain liquidity and trust across the supply chain

For the construction sector – among others – this shared commitment between private insurers and the public sector helps to minimise the impact when trading on open credit and maintain liquidity and trust across the supply chain. Trade credit insurers can continue to support certain businesses at risk of failing to receive payments on time due to the impact of coronavirus. This scheme will undoubtedly have a positive impact on the UK economy and save many companies from insolvency.

Trade credit insurance plays an understated role in the economy but is critical to its health. In normal circumstances, it goes unnoticed because it is doing its job – insuring B2B trade and paying out in the event that a customer is unable to pay its suppliers. In short, it builds confidence in the economy and bridges gaps that appear in supply chains to keep them running.

The UK’s trade credit insurers provide cover for more than £171bn of intercompany transactions, covering 13,000 clients and their 650,000 buyers. The landmark agreement represents an important alliance between the public and private sectors to support trade and prevent the domino effect that payment defaults can create within critical supply chains.

The scheme will provide a £10bn guarantee, covering 90% of B2B trade credit insurance transactions from 1 April 2020 until the end of this year. Trade credit insurers are making a significant contribution to the scheme; they will share 90% of their premiums with the state and commit to maintain extensive credit coverage to their clients. All UK-domiciled businesses with a trade credit insurance policy are covered for their domestic and export trade.

In return, the government will provide reinsurance in cases where insurers would have otherwise been forced to consider adjusting or removing cover in response to the systemic risk to the economy, created by covid-19. National governments have created similar schemes in Belgium, Canada, Denmark, France, Germany and the Netherlands.

Confidence between contractors and suppliers to trade on open credit will be essential as sites re-open, the public get used to new social distancing measures, and contractors review projects for both delivery and cost. Contractors and suppliers will focus on preserving their balance sheets and managing cash, but the new backstop helps maintain liquidity in the market and ensures insured clients can continue to trade with confidence.

The importance of the backstop is perhaps best underlined by industry data released in the days prior to its announcement. May’s construction PMI figures point to construction being at the start of a recovery but being behind the curve in comparison with manufacturing and services, the UK’s other central sectors.

While one eye will be on the chancellor’s next big intervention in the months to come, the recent announcement of close co-operation between government and the financial services sector will play an equally important role in building confidence as the construction sector supports the re-opening of the economy through the remainder of this year.

Milo Bogaerts, chief executive, Euler Hermes UK & Ireland