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.