Interview within the Aon Insights Conference December 2020
Trade Credit Insurance, which provides vital cover for hundreds of thousands of business-to-business transactions across the UK, received a £10 billion boost this year in light of the coronavirus pandemic. But how will this impact the insurance market and what is the general sentiment regarding the scheme amongst credit underwriters?
To find out, we held a Q&A with our Underwriting Director of Credit, Ray Massey, who outlined his thoughts on the UK Government’s Trade Credit Support Scheme.
THE UK GOVERNMENT TRADE CREDIT SCHEME IN BRIEF:
It evolved over many months of discussions with the insurers and their trade body, the Association of British Insurers. Finally going live in recent weeks, it backdates to April and will expire on 31st December 2020. The principal is that trade credit policies remain unchanged between client and insurer, with the UK government acting as a reinsurer behind the insurer – taking the insurer’s premium into government, reimbursing the claims paid by insurers, and insisting upon a level of underwriting support to clients regardless of the economic environment.
REMOVING THE UMBRELLA WHEN IT RAINS
The problem here is that credit underwriters’ risk appetite will move over time in response to how they perceive the likelihood of corporate insolvency. This is not dissimilar to the lending approach of banks, and the unfortunate perception can therefore arise of the “chocolate fireguard” and “umbrella being removed when it starts raining”.
How underwriters manage that inevitable reduction in risk appetite during a recession, and how they communicate their thoughts to their clients, is key. Unfortunately, the sector clearly did a poor job during the last recession of explaining their concerns and working with clients to identify opportunities to support them.
UNDERMINING THE POLICY: WHY WE HAVE NOT JOINED
As with many of the unprecedented loan and support schemes introduced across Europe in recent months, there has been a commonality in purpose and notable differences in much of the detail. That is also the case with the various trade credit support schemes introduced, and in our opinion the UK has ended up – after an initial proposal by the UK Govt was rejected and amended by the EU – with one of the least logical and appealing of all such schemes.
In times of economic difficulty and recession, the job of identifying companies and exposures that can be supported and insured is naturally more difficult as the number of insolvencies rise. That makes the job of the underwriter more important, however, as policyholders need business that can be insured and they are confident will result in payment being received.
The UK Scheme has the unintended consequence of undermining that core underwriting role, by requiring underwriters to support companies that their assessment would usually decline at this time, on the basis that the underwriter will receive reimbursement from the government for any subsequent claim payment made to the policyholder.
The obvious problem with that transaction is that the policyholder has an uninsured element to the bad debt, meaning the policyholder suffers a loss additional to the underwriter that is not reimbursed, while the policyholder has also wasted commercial time and effort with a customer which the underwriter had identified as not creditworthy. And, perhaps most galling, the policyholder could then face a premium increase at policy renewal due to that claim.
ADDRESS THE PROBLEM DIRECTLY PLEASE
The intention of assisting liquidity to UK corporates is naturally a commendable one that TMHCC supports fully. We believe it is possibly best directed at the companies directly via the various loan and support packages in place, rather than via insurers in this way. The unintended consequences of this Scheme means we believe it is not an appropriate initiative for us or our policyholders.
In response to the obvious question as to “how would you therefore have drafted such an initiative”, one could easily slip into the political question of whether “zombie companies” should be supported with government funds or allowed to survive or fail in the commercial world; rather than comment on that debate, the practical answer is that underwriters need to work harder than ever assessing companies to find sufficient to support for our policyholders to trade with safely and insured.
THE SATISFACTION RATIO
While profit margins mean that a bad debt of any level requires a significant increase in additional turnover to recoup, it should also be remembered that a small number of live companies in practice fail even in recessionary times. At TMHCC our satisfaction ratio – the proportion of exposure approved against that requested – has deteriorated from 82% to 81% only during Covid; while any decline is not our intention, hopefully that demonstrates that it is possible in this climate to work with policyholders to identify creditworthy customers and continue with the core purpose of the trade credit product – to assist in avoiding bad debts and growing the policyholders business, supported with a claim payment when the unexpected occurs.
GENUINE RISK ASSESSMENT
In practice, growing a successful business is not a short-term activity whereas the UK Scheme will have expired within 12 months in all likelihood; at that point all those companies trading with customers who the underwriter would not support without the influence of the Scheme will need to adjust their trading relationships. Policyholders of TMHCC have the confidence that every exposure supported is based on genuine risk-assessment, and not subject to expiry or review linked to a Govt Scheme.
GAZING INTO THE ECONOMIC CRYSTAL BALL
Overall, the two significant but opposing forces at large continue to be:-
- An increase in unemployment and insolvency levels that the consensus opinion is suggesting will be a multiple of that experienced in the last recession of 2007 / 8
- This prospective increase is offset by the impact of the unprecedented levels of government support for businesses of all size and sector
To what extent the government’s intervention eventually reduces the downturn to come will become an economic conundrum for years to come we suspect. It is obviously impossible to prove, but one has to hope such levels of investment that will take decades to repay will have a significant impact not least to justify the action. The experience to-date is that the level of insolvency one would usually have expected to see by this point has not materialised – yet.
Written by Ray Massey, Underwriting Director – Credit
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