UK Govt Changes Credit Insurance To Ease Access

LONDON (Dow Jones)--The U.K. government Thursday bowed to pressure from business groups and said it is making further changes to its trade credit insurance scheme to reduce the cost for companies and ease access.

The government also released numbers showing that the scheme has so far been taken up by only a few dozen companies, a fresh sign that government programs to cushion the recession's impact have had mixed success.

A spokeswoman for the U.K. Department for Business, Innovation and Skills told Dow Jones Newswires that the department is halving the cost of the scheme to 1% from 2% of the cover being provided. She said the government is extending the upper limit on the topup cover to GBP2 million from GBP1 million. It is also removing a previous floor of GBP20,000 for companies seeking government cover.

The changes, later confirmed by the government in a press release, follow a concerted campaign from business groups, which said companies are continuing to suffer from disruptions to their supply lines due to the lack of credit insurance. A recent survey from the Confederation of British Industry said access to credit insurance declined "rapidly" in the three months to July.

Trade credit insurance is used to protect suppliers against the risk of non-payment by buyers of goods. The insurance, which is vital in maintaining supply lines, was thrown into the spotlight after cover was reduced on suppliers to a number of prominent companies, including the now-collapsed U.K. retailer Woolworths Group.

The topup scheme allows suppliers to buy government-backed insurance to restore cover to the original level of protection or double the amount of insurance they are able to obtain from the private sector up to a value of GBP2 million. The scheme will end at the close of 2009.

The latest move represents the second time the scheme has been modified since its launch May 1.

The government set a cap of GBP5 billion for the total insurance cover it is prepared to provide. But Thursday it said, thus far, 52 companies have had their applications to use the scheme approved, resulting in cover of GBP7.1 million.

The fact that only a slither of that coverage has been used suggests the credit insurance scheme hasn't been as effective in helping smaller companies, in particular, as the government had hoped. That is part of a broader story, during the recession, where several of the government's much-trailed programs for businesses, struggling mortgage holders and jobseekers haven't generated much demand.

But the government has always stressed the GBP5 billion coverage ceiling is a maximum, not a target. Officials have said the scheme is meant to provide targeted, temporary help for those businesses caught out by rapidly changing credit and economic conditions.

The spokeswoman said there is evidence the scheme has helped achieve that, with companies now adapting to reduced access to trade credit insurance, which during the boom years was a cheap alternative enabling firms to hold less working capital.

"The government's topup scheme is providing temporary help for businesses as they readjust to changed conditions. Our evidence indicates that the majority of businesses are now managing their credit risks actively, reducing their dependence on trade credit insurance," the spokeswoman said.

Reaction to the government's move was mixed, with the British Retail Consortium saying the scheme needs to be back-dated further.

"The government's decision to improve some elements of the trade credit insurance top-up scheme may help a few but the changes don't go far enough. To make a real difference the scheme needs to be back dated to last April - when insurers began removing cover as the recession began," BRC Business Environment Director Tom Ironside said.

However, trade credit insurance companies Atradius Credit Insurance NV and Euler Hermes SA UK (ELE.FR), welcomed the changes, saying they addressed issues the firms had raised with the government.

"We are pleased that the government have taken our feedback on board and that they remain committed to increasing the relevance of the trade credit insurance top-up scheme," an Atradius spokesman said.

A spokeswoman for the Association of British Insurers, which was involved in developing the scheme, also welcomed the changes. She said the industry currently insures some GBP300 billion of U.K. trade.

Home Retail sounds alarm on credit insurance risks

Argos and Homebase parent Home Retail Group has written to its suppliers urging them not to do business with retailers that have had their credit insurance removed.


In a letter, seen by Retail Week, Home Retail Asia managing director Graham Kibby wrote: “In the event that credit insurance is refused for one of your customers we strongly recommend that
you do not do further business, as it is quite likely that you will not get paid.”

He said it is “an extremely dangerous practice” for suppliers to continue to work with any open account customers that cannot get credit insurance cover.

The move has sparked anger among rival retailers, with critics accusing Home Retail of piling more pressure onto struggling store groups already suffering from a withdrawal of credit insurance.

Many retailers have had some or all of their credit insurance scaled back since the recession hit, including DSGi and Focus. A withdrawal of credit insurance was one of the key contributors to the demise of 99-year-old chain Woolworths.

A Home Retail spokesman said that it accepted “the letter could have been worded better” but it was intended to raise suppliers’ awareness of a “serious issue”.

He said that Home Retail wanted to offer some “practical advice that would help to protect their interests” and added it is “not company policy to insist on suppliers holding credit insurance”. The letter also said Home Retail’s credit rating “remains very good”, and added “like many, we are experiencing a slowdown in current trading, but we do have cash in the bank and retain the confidence to lend within the banking sector”.

The spokesman said the letter was sent to a “small number of Argos and Homebase suppliers in Asia, alerting them to an industry issue”.

But one rival retailer feared suppliers would stop doing business with them as a result. The retailer said: “Home Retail is a big player. If you’re a supplier you might take notice.”

Retail Knowledge Bank senior partner Robert Clark said: “It’s a perfectly valid point that Home Retail doesn’t want its suppliers getting over-committed to retailers that might collapse,
but there are other ways to go about things.”

Business insurance scheme gets poor take-up

A widely promoted government scheme offering up to £5bn to help protect suppliers from the collapse of their customers has so far provided only £7m of assistance to 52 companies.

Announced in the Budget, the government’s trade credit insurance top-up scheme was designed to shore up the market as nervous private sector insurers cut their exposure during the credit crisis.

On Thursday, the business department said it was widening its criteria and cutting charges to 1 per cent to enable more entrepreneurs to take up the initiative. The paucity of the take-up is an embarrassment for the government, given that it was forced to loosen the scheme once before.

“The scheme is £5bn, but we have never assumed that it would get to that level. That’s the amount in the programme should there ever be sufficient demand,” the business department said.

The scheme allows suppliers to buy six months of government-backed insurance either to restore cover to its original level or to double the amount they can obtain from the private sector. The four largest credit insurers have all signed up to the initiative: Euler Hermes, Atradius, Coface and HCC.

Overall, the private sector provides £300bn of trade credit insurance a year covering transactions by about 250,000 companies.

In June the department bowed to pressure from business to backdate eligibility to include suppliers that had had cover reduced since last October.

The British Retail Consortium, the trade body for retailers, on Thursday welcomed the government’s latest move, but said the scheme needed to be backdated until April 1, when insurers began removing cover.