25 June 2020

UK Government Trade Credit Insurance Scheme: How It Can Support Your Business

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Matthew Strong

CEO, Credit Specialties,

UK & Ireland

Ian Watts

Practice Leader, Trade Credit,

UK & Ireland

Steve Howells

Head of Major Accounts, Trade Credit, UK & Ireland

Speakers

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• The impact of COVID-19 and UK Government response.

• Importance of credit sales to the UK economy.

• How does credit insurance support the UK economy?

• Details of the UK Government scheme.

• What can your business do to prepare?

• Our commitment to you.

Agenda

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COVID-19 ImpactA Rapidly Evolving Global Emergency

Source: John Hopkins University

• First reported on 31 December 2019.

• Declared a public health emergency of international concern by the World

Heath Organisation on 30 January 2020.

• As of 24 June 2020:

• 9.2 million global cases reported.

• 477,800 reported deaths.

Travel restrictions and lockdown affecting over half the world.

Flight, conference, and event cancellations.

Supply chains fracturing.

Market volatility and global recession.

Employee infection risk, workforce downsizing, working from home, productivity losses.

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GDP Impact and Default Metrics

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Source: Moody’s Investors Service March 2020 Default Report

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UK Economic Response

• £490 billion package.

• £330 billion in state loans and guarantees to UK businesses (COVID-19 Corporate

Financing Facility, Coronavirus Business Interruption Loan Scheme).

• £30 billion deferral of VAT.

• £130 billion discretionary spending (NHS, business support, welfare, job retention

scheme).

• Suspension of business rates.

• Public sector loans to support private investment – £250 billion.

• Interest rate reductions.

• Bank of England relaxation of the countercyclical capital buffer to 0%.

7Source: Organisation for Economic Co-operation and Development

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The Importance of Open Credit to the UK Economy

• UK GDP (2019) is £2.21 trillion – total of all production in the UK. (HM Treasury)

• Insurers cover circa £350 billion of credit sales (domestic and export) at any one time. (HM Treasury)

• Of all UK company assets, just under 40% are held in trade receivables.1

• Estimates that unsecured trade credit delivers a 1.5 multiple to overall money supply.2

• Research in the 1990s concluded trade credit has exceeded the entirety of bank lending.3

• 90% of UK firms sell 80-100% of goods on credit terms. Over 30% of UK business only sell on

credit terms.4

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1 ,4 Paul, S., Wilson, N., 2006. Trade credit supply: an empirical investigation of companies level data. Journal of Accounting-Business and Management. Quoted here:

https://pearl.plymouth.ac.uk/bitstream/handle/10026.1/11332/secret%20life%20of%20trade%20credit.pdf?sequence=1&isAllowed2 Wilson, N., Summers, B., 2002. Trade credit terms offered by small firms: survey evidence and empirical analysis. Journal of Business Finance and Accounting. Quoted here:

https://pearl.plymouth.ac.uk/bitstream/handle/10026.1/11332/secret%20life%20of%20trade%20credit.pdf?sequence=1&isAllowed=y3 Lee, Y.W., Stowe, J.D., 1993. Product risk, asymmetric information and trade credit. Journal of Finance and Qualitative Analysis 28 (2). Quoted here:

https://pearl.plymouth.ac.uk/bitstream/handle/10026.1/11332/secret%20life%20of%20trade%20credit.pdf?sequence=1&isAllowed=y

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OVERALL GROWTH IN HOSPITALITY & GAMING SECTOR IS INFLUENCED BY AFFORDABLE TOURISM, INCREASING INVESTMENT AND TECHNOLOGICAL

ADVANCEMENTCOVID-19Financial Impact

Financial Impact

• Global supply chain disruption.

• Increase in corporate defaults.

• Some industries more affected: travel and hospitality, aviation, logistics, retail, commodity traders.

• U-shaped recovery predicted, more protracted if further severe outbreaks occur.

• Severe economic downturn predicted.

• Economies in various stages of shutdown.

• Impact on corporate sales.

• Significant surge in trade credit past dues.

Source: Marsh JLT Specialty Observations

Policy Impact

• Underwriters taking a more conservative risk approach.

• Impact on reduced/cancelled limits.

• Increased claims.

• Potential increase in premium rates.

Credit Risk

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Countries With State Support for Credit Insurance As at 5 June 2020

NORTH AMERICA EUROPEASIA PACIFIC/

MiIDDLE EAST

• Canada

• USA

• Belgium

• Denmark

• France

• Germany

• Netherlands

• Poland

• Russia

• Slovenia

• Spain

• Turkey

• UK

• China

• Hong Kong

• India

• South Korea

• Thailand

• UAE

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Trade Credit Insurance UK Government Support Scheme

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All insurers eligible to join voluntarily.

Coface, Euler Hermes, and Atradius will join.

More likely to follow.

Covers clients domiciled in UK where UK insurance premium tax is paid (or where export from UK).

Insurers measured on reinstatement and

expected to reinstate cover. Will still be expected

to maintain prudent risk underwriting.

Likely insureds will have to substantiate level of need

when seeking reinstatement.

Government insures 90% of losses.

Insurers cede 90% of premium.

Effective from the 1 April 2020,

losses attached to the prior period are not covered.

Participating insurers signed up to broad terms of reference.

Further information to follow.

£10 billion, expected losses for UK insurers are

between £1-2 billion. Relates to claims paid, not

cover written. Total UK cover approx. £350 billion.

No specific rules on what’s included -driven by market

forces and insurer appetite.

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What Do You Need to Do?

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Review bad debt provision.

Assess the vulnerability of

your supply chain.

Assess your exposures.

Credit control and review payment terms.

Access to finance.

Credit management.

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Case Studies

• Risk Transfer: The Impact of Bad Debt

SME with £1.5 million loss on British Steel.

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Finance

Growth

Credit Management

Risk Transfer Supply

Chain

• Credit Management/Corporate GovernanceGlobal office supply company with multiple offices across Europe.

• FinanceUK-based services company experienced difficulty obtaining required credit limit on key buyer, leading to lower levels of financing.

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Case Studies

• Growth

Fast-growing UK SME selling construction

materials experienced restrictions with their

specific export customers.

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Finance

Growth

Credit Management

Risk Transfer Supply

Chain

• Lubricating the supply chainNational tool hire group having to pay a major manufacturer on pro-forma terms due to mistaken cover withdrawal by major insurer.

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What Next?

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Option for Marsh JLT

Specialty to investigate

creditworthiness of your top

few customers.

Service to liaise with credit

insurance market to ensure

your key suppliers have the

insured credit limits they

need.

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Q&ATo submit a question, click on the Q&A icon on your screen. Type your question in the open area and click “SUBMIT.”

If a question is not answered during today's webcast, someone from Marsh JLT Specialty will respond as soon as possible.

MARSH

Managing COVID-19 Risks

For the latest information visit

Marsh’s Pandemic Risk Hub at

www.marsh.com

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