As explained in the previous article, the launch of trade credit insurance in an emerging market such as Dubai involves five phases: awareness, growth, exuberance, education, and normalisation. This article will look at the first of these phases: awareness.
Why was trade credit insurance launched in Dubai?
Trade Credit Insurance was first introduced in Dubai in 2004 with the main credit insurers, starting with Atradius, followed by Euler Hermes and finally Coface, establishing offices or more specifically “risk offices”. Clients of these credit insurers located in developed markets such as Europe and the USA were expanding their operations in the Middle East and consequently needed to secure their sales. Therefore, “credit risk offices” were set up to financially assess distributors located in Dubai or in the GCC, with whom European or American companies were doing business.
How do you assess a business in Dubai?
Assessing large local corporates, which come first or second within the supply chain, was the first task of credit insurers. Despite the size of these corporates, it was challenging at the beginning to assess the commercial risk properly due to two factors: lack of financial transparency and lack of awareness of trade credit insurance. It was a new concept for the region and everything newly introduced in a market always takes time to mature.
Furthermore, you do not assess businesses in the GCC only by looking at their audited financials, as they often do not reflect the company’s health and sometimes businesses do not even produce reliable financials. In addition, you cannot really count on information providers such as those in Europe to provide you with reliable information as most of the time you just get the most basic information about the business. As a consequence, you need to visit and meet the management in order to get a better understanding of the business.
Building up a database, the Alpha & Omega of credit insurance
Building up a database and most importantly getting the “payment experience” is the alpha & omega of each credit insurer establishing offices in new markets. You start developing “payment experience” when policy holders report delays in payment from their buyers which is also called ‘overdue’. Credit insurers generally tend, at least at the beginning, to focus on some specific industries such as IT/Electronics and construction to gather the maximum amount of information within the supply chain. Then, a virtuous cycle is initiated; the more clients you have within a specific industry, the more payment experiences you accumulate.
The downside of this approach is the risk concentration within a specific sector, when spreading the risk through different industries is one of the basic rules of each and every insurer.
To conclude, trade credit insurance was gathering steam within Dubai and the GCC by the end of 2010. This momentum was facilitated by the economic recovery taking place in the GCC countries; the price of oil was recovering and risk appetite of credit insurers was high. Growth within the trade credit industry was thus at a turning point.
Read Epsiode 3: Growth now