Guidance on trade credit insurance to support construction supply chain

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Trade Credit

The Construction Leadership Council (CLC) Covid-19 task force has published Trade Credit insurance guidance to support construction businesses

The Trade Credit insurance (TCI) guidance provides support for companies in the construction and maintenance supply chain, including building merchants and suppliers.

The guidance aims to supply practical advice and considerations for discussions with brokers and insurers when seeking Trade Credit insurance.

Given the sudden disruption to economic activity, reduced cash flow and the resulting increased risks of insolvency and default in the market, businesses have seen Trade Credit insurance withdrawn, premiums increasing significantly, or the level of cover offered reduced.

The withdrawal of cover could cause further difficulties for businesses, by placing pressure on liquidity, necessitating changes to payment terms, and depriving SMEs in the construction sector access to credit, on which they depend.

Trade credit reinsurance scheme

On 4 June, the government announced the Trade Credit Reinsurance Scheme, which reinsures Trade Credit insurance currently provided for hundreds of thousands of business-to-business transactions in the UK.

The reinsurance is capped at a maximum of £10bn of total insurer losses.

The Trade Credit Reinsurance Scheme will be delivered through a reinsurance agreement. All trade credit insurers currently operating in the UK are eligible to participate. The reinsurance covers trading by domestic firms and exporting firms with payment terms of up to 2 years.

Government will reinsure 90% of insurance claims up to a cap of £3bn total insurer losses and 100% of claims between £3bn and £10bn of total insurer losses. The government will receive 90% of gross policy premiums and return 35% of these premiums to insurers to cover their costs.

Scheme rules will require participating insurers to comply with certain undertakings regarding the conduct of their business during the period of the scheme. This includes conditions that they will forgo profits and not pay dividends or bonuses for senior staff for their reinsured TCI business.

The reinsurance will be temporary, backdated to 1 April and lasting until 31 December 2020 subject to possible extension at government discretion and insurer agreement. It will be followed by a joint Department of Business, Energy and Industrial Strategy (BEIS)/Her Majesty’s Treasury (HMT) review of the TCI market to ensure it can best support businesses in future.

Read the full guidance here.

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