Why the UK should take note of Germany's credit insurance masterstroke
Credit insurance expert Mike Stott on how the government needs to do more
At some point the lockdown will be lifted. The shops, pubs and restaurants will reopen. People will go back to work. But business won't be the same.
Let's fast forward ten weeks or so. Your company has borrowed from the bank, most of the people who work for you still have jobs and production has started up. You receive a large order from a customer who ordered regularly from you before the world had heard of Coronavirus. You want to supply him, but he has asked for 60 days' credit. How do you know he can pay? There has been a massive hiatus, a huge disruption. Although that company was economically viable before the world stopped, is it now? Looking at that customer's accounts at Companies' House is no use; there has been a sea change since then. Just this one act could send you to the wall and the struggle to keep your head above water will all have been for nothing.
After World War 2 (two years after in fact) the USA realised that the world economy was not going to rebuild itself. Western European economies had been devastated by over five years of war. Economies had to change from war time to peace time. The Marshall Plan was launched, pumping huge amounts of money into Britain, France and West Germany.
Already governments have pledged huge amounts of money to support businesses, but in the UK this does not go far enough. Businesses must be confident that they will get paid for the goods and services that they supply. The only operations that are tooled up to gather and analyse current financial information on buyers, as opposed to the redundant information at Companies' House, are credit insurers. They have already experienced something akin to this in 2008, albeit not on this scale.
The problem is that these insurers are commercial businesses. They are not charities. Even before this unprecedented crisis they were struggling for profitability. It is estimated that claims next year will exceed £1.5bn. Annual premium revenue for credit insurance in the UK is £500m. If the Government offer underwriters no help then vast sections of the British economy are likely to have very little or no cover for a substantial period of time. This will add to the inevitable economic depression.
So far, the UK government has expanded the remit of the UK Export Finance (UKEF) body to cover buyers in the EU, USA and other developed economies where cover has been cancelled. This is likely to be deeply inadequate. UKEF do not have the information or the staff to address the scale of this problem. It also leaves the problem of supplying UK customers unanswered.
In Germany, the government has already solved this problem. In return for two-thirds of the insurer's premiums the German government will indemnify the domestic credit underwriters against any losses. Any credit limit cover that was in place on 1 January will be held in place for German businesses. In the UK, credit limit cover has already begun to be cut substantially. The German government is almost certain to lose money on this, but given the money that has already been pledged to businesses, these losses are likely to be a drop in the ocean. It also gets business back on its feet. It injects confidence and it completes the investment circle. Trade credit is as important as bank lending, and it is not equitable for the UK Government to secure the risks of the banking sector and to not offer the same security to the credit insurance companies. If the UK doesn't do this we will be at a considerable disadvantage compared to our continental neighbours. At a time of leaving the EU we need at least an equal start for UK businesses.
This support must be in place before the lockdown is lifted.
If you are a business owner, and particularly if you have a credit insurance policy, I urge you to email the Secretary of State for Business, Alok Sharma, and demand that he supports credit insurance cover in the UK on the same basis as Germany. His email address is:
For any credit insurance brokers reading this, you have my permission to copy and paste any or all of the content and rebadge it as your own work. What is important is for British business to tell the UK Government how vital this support is.
Mike Stott is insurance broker at Rycroft Associates