After a period of exuberance, it is always a challenging time for businesses to adjust to a new reality and fledgling ones without sufficient capital buffers generally do not survive. It is even more difficult in a flexible economy such as Dubai, as the adjustment is carried out very quickly by bankers and credit insurers; bankers reduce dramatically the volume of finance facilities offered to local companies and even exit from some fragile industries. Credit insurers also adjust their risk exposure very abruptly, which restraint principals and distributors to deal on open credit terms with their clients. But at the end of the day, this correction was needed to cleanse the trade credit insurance market from its over-exuberant behaviour and get back to solid ground.
Introducing best practices into the market
Starting from that point, you can introduce ‘best practices’ into the market and spend time explaining to policy holders and bankers how to deal properly with trade credit insurance. This education phase is facilitated by the fact that more experienced and professional people from the trade credit industry are available in the market; risk underwriters and credit analysts assess the risk more accurately and detect suspicious behaviours more easily and rapidly. Ultimately, the human capital available within an industry is one of the most important assets for a country in the long run.
Best practices have been combined with new regulations introduced by local rulers to strengthen the economy, such as introducing a new insolvency law and enhancing information exchanges between banks through the creation of the Etihad credit bureau, to give just two examples. Of course, there is still a long way to go and the trade credit insurance industry will face many other hurdles, but the momentum is underway.
Low market penetration
The market penetration of trade credit insurance in the GCC is still very low compared to mature markets in Europe. If we take France as an example, their premium to GDP ratio is much higher than the UAE, which shows that there is an opportunity for growth.
Coming back to the basics of trade credit insurance
It is always important to come back to the basics of trade credit insurance which is: Prevention, Collection and Indemnification. The prevention element offers policy holders a tool to select the healthiest customers to work with; the collection elements help policy holders to recover overdues and the indemnification element secures cash flow. Quality of prevention has improved over the last two years in Dubai thanks to investment from credit insurers in their risk teams; collection is still at the embryonic stage and indemnification should be better. Better prevention should help credit insurers to manage their loss ratios and the level of indemnification should thereby improve.
This education phase is underway and it will last a couple of years before we reach the next phase: Normalisation.