News & Events

Trade Credit: A nervous time for a re-emerging economy

Thursday, June 17, 2021

With restrictions continuing to ease across the UK now more than 15 months after the pandemic began, how have multiple lockdowns and measures such as social distancing impacted the economy and, critically, the Trade Credit market?

To find out, we recently hosted a Q&A with our Underwriting Director - Credit, Ray Massey, who outlined his thoughts on the UK’s economy, government support schemes, and pressures businesses will face.

Watch the full interview here and read our write up below. 


The big question, as we emerge from lockdown, is what the economy is going to look like and how its constituent parts will perform. We can assume that bars, restaurants and high street retailers will experience an immediate surge in demand and other sectors such as tourism and transport could also witness a quick uptick.

Whilst the UK’s growth prospects have been estimated by the Organisation for Economic Cooperation to be 7.2% this year and 5.5% for 2022, the economy is unlikely to fully recover until sometime in Q2 2022.

But these are just predictions – the reality is that we really won’t see the true economic impact of the Covid pandemic until Government support schemes are fully withdrawn and businesses are asked to once again stand on their own two feet.

One of the reasons for this uncertainty is that the very schemes that have helped businesses survive have also distorted the data making any attempt to get an unobstructed view of the picture almost impossible.

Recent E&Y/Parthenon analysis suggested that Government support prevented 6,000 UK companies entering into insolvency if the pre-March 2020 trajectory had continued, which lays bare just how much of a negative impact the withdrawal of support could still have.

We may not know for sure what is going to happen but it’s clear that our economic recovery is going to be dependent upon increasing productivity but even here, we struggle to get a meaningful view.

Improving productivity is the key

There is no clear indication of any underlying improvement in UK productivity and it will take some time for the data to settle down before we can make a reasonable assessment of what is going on.

Actual growth numbers showed a 300-year record reduction in output in 2020 but also a record 16% quarterly increase. And the productivity numbers are similarly confused – you can point to a 3% increase in output per hour and a near 9% reduction in output per worker at the same time.

Whatever reality emerges, the key drivers of productivity – investment, infrastructure, innovation and skills – will all need support to give the economy the best chance of emerging from this period in reasonable shape.

While the Government has focused on significant infrastructure spend (both traditional and green), to date, there has been little in the way of support for innovation and skills. Left unsupported, labour shortages and increased inflation will push employees to higher-performing companies who can offer the salaries and perks need in a sellers’ labour market.

And the inevitable increase in interest rates may finally push debt servicing costs for ‘zombie business’ to unaffordable levels.

In addition, the changing nature of how even traditional businesses operate will have to be taken into account. Some aspects, like digital trading and servicing, will stick but others, like shorter supply chains, may not.

The crucial role of Trade Credit insurance

All of which has huge implications for the Trade Credit market. So far, we haven’t seen the upsurge in insolvencies that many in the market feared and as the below graph shows, the number of registered company insolvencies in March 2021 was 20% below that of March 2020 and 37% below March 2019.


There is a general consensus that insolvency levels are set to increase in the coming months, particularly as the Government Trade Credit scheme comes to an end.

As recently as three months ago, a number of forecasts for 2021 predicted a 50%+ increase in UK insolvencies, alongside a number of developed markets such as France, Italy, Spain, South Korea and Singapore. But so far, that prediction is not supported by the data.

At Tokio Marine HCC, our view is that Government support has delayed the inevitable longer than expected and that the majority of insolvencies will occur in 2022. But it’s coming, of that there is no doubt, particularly with deferred loan and VAT repayments, the suspension of creditors’ ability to issue winding up petitions and furlough support all coming to an end relatively soon.

Bearing all of this in mind, it is clear that 2021 is the year to engage with Trade Credit support to give businesses the best chance of a successful 2022. But one of the support initiatives, the Trade Credit Reinsurance Scheme, may actually make that more difficult for firms.

A landscape changed by Government support

Insurers that took part were effectively encouraged to underwrite risks that they may not normally have done with the promise of Government support in the event of a claim. It was deemed necessary by the Government and many Trade Credit providers but in our opinion, it may have encouraged insureds to trade with companies that are poor credit risks.

While the scheme was in place that was fine, but what happens when it is removed? Will limits be removed disrupting supply chains and cash flow, just as activity starts to increase?  The potential repercussions for clients are daunting.

We would hope that the insurer’s mistakes of 2008 are not repeated. Either way, our view is that there is a real risk that insolvency levels increase notably just as Government support is removed.

But not every insurer took part in the scheme. Tokio Marine HCC didn’t because we felt it completely undermined the principles of risk management which underpin every Trade Credit policy. Throughout this period, we have continued to underwrite and rate risk as we always have – based on the available data.

We will continue to do that but while we will always remain true to our underwriting principles, we understand that the way we underwrite has to adapt to the reality our clients are experiencing.

A new approach to Trade Credit

Take the casual dining sector for example. The forced closure of an industry sector and subsequent reopening - to strong demand - is not a scenario that a UK credit underwriter has faced in recent times.

The standard risk underwriting response – of seeking current management information to gauge most recent trading data – does not work as it shows zero revenue and net losses, regardless of the inherent strength of the business.

But withdrawing support until positive trading information is available – probably not until the end of this year at the earliest – is not a viable choice for us. Our support is needed more now than ever.

So rather than seeking positive trading information that doesn’t exist, we will be seeking confirmation of a company’s liquidity position and headroom, alongside their forecasts and historic performance.

Those companies that had strong businesses prior to Covid and have sufficient liquidity to get them back on their feet and capitalise on the new opportunities will benefit most and will be able to draw on the value and security that Trade Credit insurance brings.

While we wait to see how the wider trade credit market reacts, Tokio Marine HCC can provide much-needed certainty, continuity and reassurance to brokers and their clients.

We are ready to pay the claims we know are coming because we have underwritten them properly – everything is planned in – and for future clients, we are providing flexibility to ensure they get the necessary support in their time of greatest need.

If you are interested in finding out more about the immediate future of the Trade Credit market and Tokio Marine HCC’s approach, we’d love to see you at one of a series of workshops we are hosting in London, Manchester and Birmingham throughout the month of September where our specialist underwriters will share their views and listen to yours.

Ray Massey

Questions for Ray?

Contact Ray via emailLinkedIn,
or call +44 (0)20 7680 2939.

Market-leading trade credit policies

As a market leader in Trade Credit policies, we provide a full range of short and medium-term coverages, including single debtor, multi-debtor, and bank coverages, to protect against non-payment.

Click here to visit our Whole Turnover Credit page for more information.