The British government's new credit insurance scheme, announced as part of its annual budget by Chancellor Alistair Darling on April 22, 2009, responds to concerns that hundreds of supply chains in the UK are threatened by the recent reductions in credit insurance. The scheme will be available to the 14,000 businesses that already use trade credit insurance and will mitigate against disruption to the supply chain and cashflow of the 250,000 companies they do business with, should their trade credit insurance limits be reduced. From May 2009 until the end of December 2009, firms will be able to purchase six-months' 'top-up' insurance from the government if credit limits on their UK business clients are reduced, backdated to April 1, 2009. The amount available to each supplier will be either restored to the original amount covered, doubled to the amount the company is able to obtain from the private sector, or GBP1m, whichever is the lowest.
Trade credit insurance protects suppliers that sell goods on credit to companies, such as retailers, against the risk that they will not get paid, generally as a result of default or insolvency of the company. Indeed, credit insurance has become even more important to many businesses due to the credit crunch, as the lack of easy credit has led to longer waiting times for payments along the supply chain.
According to statistics from the Association of British Insurers (ABI), the value of claims received by insurers for credit insurance policies rose by 40% to GBP360m in 2008. As a result of deteriorating economic conditions and higher claims costs, credit insurers have been adjusting their risk appetites, which has resulted in the reduction or withdrawal of cover from many businesses. Without credit insurance, firms have been asked to pay more quickly or even in cash upfront, which is difficult for companies that are already struggling and can tip them into insolvency. According to a survey by the British Retail Consortium (BRC), half of large and more than 40% of small and medium enterprise (SME) retailers said the reduction or withdrawal of credit insurance had negatively impacted their ability to trade.
The withdrawal of trade credit insurance has already been cited as a factor in several retailers, such as MFI and Woolworths, going into administration. However, the government scheme will only be backdated to April 1, 2009, meaning many companies that have already had their cover reduced will be unable to make use of the program. Jane Milne, BRC business director, said "this scheme is much needed but this is too little too late". Although Datamonitor agrees with the BRC's concerns and believes that the April 1 cut will limit the beneficial effects this scheme will have for SMEs, it is still felt that this scheme will reduce uncertainty for many SMEs going forward.
In particular, the scheme appears well grounded, as it is based on the risk assessments carried out by private insurers and, according to the ABI, it should ensure that healthy companies get extra support. Consequently, Datamonitor believes the government trade credit scheme will boost business confidence as a whole and be a lifeline for some already troubled firms, therefore aiding economic recovery.
