Retailers are lobbying the British government to extend the scheme that guarantees trade credit insurance amid fears that many could be left without cover when it ends.
The trade credit reinsurance scheme was introduced in May 2020 and offers indemnities to specialist insurers who cover suppliers against the risk of non-payment by their customers.
The British Retail Consortium has written to business minister Paul Scully arguing that if insurers base risk assessments on retailers’ recent financial performance, many will be left without cover.
The letter, seen by the Financial Times, said the withdrawal of support was a “significant concern” and that members “are already hearing from multiple suppliers that the large insurers have stated they will remove cover”.
Insurers typically require at least six months of consistently strong trading data before reassessing coverage decisions, the BRC said. “Clearly this is not yet possible for the significant proportion of the retail industry that has remained closed for the majority of 2020-21”.
Even where retailers have provided provisional data, insurers have been slow to revisit underwriting decisions, the letter added — although insurers maintain that overall coverage is largely back to pre-pandemic levels and they are making allowances for the disruption to trade over the past year.
Mike Stott, a credit insurance broker with Rycroft Associates, said retail “was not in a good place before the pandemic and this is going to make things worse”.
Stott added that insurers, who had to hand over 90 per cent of their premiums to the government in return for the state guarantee, “need to make some money this year and they can’t do that if there is a tsunami of claims”.
“They will be unwilling to take chances on cover without good supporting information,” he said.
Suppliers, and their lenders, may be nervous about extending uninsured credit to retailers whose balance sheets have been damaged by the enforced closure of shops during lockdowns. That could leave some retailers having to pay upfront for goods as they build inventory for Christmas, tying up vital cash.
“It is a massive issue for us,” said the chief executive of one smaller apparel retailer. “Around 10 per cent of my annual turnover is tied up in prepayments that I wouldn’t have to make if my suppliers could insure against me. I’d be able to double my annual capital spending.”
“I’ve presented to all the credit insurers and they are supportive of the plans, but they want to see two years of profits,” he added.
Although there has been a strong bounceback in retail sales since non-essential stores in England reopened in mid-April, demand remains difficult to forecast and operating costs will be rising soon.
Data published by the consultancy Springboard last week showed the recovery for retailers since indoor hospitality was allowed to reopen on May 17 had been more subdued than anticipated.
The business rates holiday also ends on June 30, though a discount is still available for smaller retailers, and the furlough scheme will wind down over the summer.
Euler Hermes, one of the UK’s biggest trade credit insurers and a participant in the reinsurance scheme, said it expects economic and corporate credit risks to remain at high levels “and recognises these continue to be challenging times for many companies”.
“We are already in contact with our customers and business partners, helping them to create a smooth transition,” it added.