The state is becoming businesses’ insurer of last resort. Is this wise?

Trade credit insurance is a key part of Britain’s economic plumbing. It was in danger of springing a leak until the government stepped in with an emergency plug – but it could prove very expensive, writes James Moore

Insurers like Lloyd’s of London are facing huge bills from pandemic-related claims (Reuters)

There are so many things we rely on that we don’t notice until they threaten to break. Plumbing is a good example. Trade credit insurance is a key part of Britain’s economic plumbing. It was in grave danger of springing a leak until the government stepped in with an emergency plug.

Its function is to protect companies against the risk of their customers going bust before paying for goods and/or services. By ensuring they get paid, the insurance allows businesses to trade with each other with confidence and thus assists with the smooth functioning of the economy. Well over half a million firms of them have it.

It doesn’t take the brain of a PhD candidate to see why it’s currently causing a problem. Thousands of companies are teetering on the brink, so many that some of the insurers that sell it could very easily end up joining them.

At the very least, the price of securing cover in future could rise rapidly as insurers seek to recoup their losses. Some companies mightn’t be able to handle the sharply increased cost.

The risk of this squirting a tank full of foul-smelling goo into an economy already on its knees was very clear. Hence business secretary Alok Sharma announcing plans to “temporarily reinsure the credit risks of business-to-business transactions covered by trade credit insurance in the UK via a new Trade Credit Reinsurance Scheme”. Snappy the announcement isn’t. Important, though? Very.

The scheme will cover 90 per cent of claims up to £3bn and 100 per cent between £3bn and £10bn in return for 90 per cent of the premiums, although a big chunk (35 per cent) will be returned to insurers to cover their costs.

We’re told that insurers joining the scheme won’t be able to make profits from it, nor will their executives be able to use the business written to flatter their bonus calculations. That’s good politics which should also serve to reduce the potential moral hazard of the scheme if it works properly.

So another another tick in the box for the governments economic portfolios, which have acquitted themselves relatively well at a time when you’d have to be looking through the most rose-tinted of spectacles to give the rest of government a grade of D-minus over the period of the pandemic.

Here’s where it gets interesting. The government is going to institute a review of the market after the scheme closes to make sure it’s working. Could this lead to more intervention? You wouldn’t rule it out.

There’s also a move to involve the state in the provision of a variety of other types of insurance in the event of future pandemics.

They will emerge. The current one is likely to be with us for much longer than a lot of people fondly imagine.

What the arrival of Covid-19 has made clear is that only the government has the resources to provide, let’s say, business interruption cover in the event of a future lockdown.

The state playing the role of insurer of last resort isn’t new. It was involved in the creation of Flood Re, which ensures that householders in areas at risk of flooding can obtain cover at an affordable cost, for example.

Due to come to an end in 2039, Flood Re is funded by an industry levy.

If the state is going to stand behind schemes to cover private businesses against pandemic-related risks, and there are good arguments to make for it doing so, the public interest needs to be similarly protected.

Any such schemes will need to be priced appropriately, on commercial terms.

If the taxpayer is going to stand behind private business, and cover it against risks, the taxpayer should expect a return. The jobs market being like it is, there should at least be a ready supply of people available to assist with that.