Let’s try to put ourselves in the shoes of a CFO who is looking for credit insurance in Dubai. What should the first question be?
Well, perhaps he should start with:
What is the company’s purpose for buying credit insurance in Dubai?
There are several benefits from credit insurance in Dubai, insurance protection of account receivables of course but also default prevention, debt collection or access to more working capital. However, I shall leave aside the collection benefit for now as it is not yet mature locally.
Which of the credit insurance solutions will fit best the company’s requirements?
The business would like to grow its turnover by working with new clients, offer more favourable credit facilities to existing clients and explore new markets. The best solution might be to go for a Whole Turnover policy which is offered by credit insurers such as Atradius, Coface and Euler Hermes. This solution is designed for businesses with minimum yearly sales of $5m.
What is a Whole Turnover solution?
The open account sales are insured by a credit insurer and the policyholder has access to a database. He can request coverage on its buyers and depending on the creditworthiness of the buyer, the policyholder can be granted a credit limit.
These three credit insurers are competing to provide the best quality in terms of database. Knowing that they buy basic information about companies from the same providers, they add value through the quality of their risk teams. Moreover, as the financial information is not readily available in this market, experienced risk underwriters who know the local businesses well are key to delivering a reliable product in such an emerging market environment.
What is the cost?
Credit insurers charge a premium rate on the insurable turnover; the higher the insurable is, the lower the premium rate is. To give you an idea of the price, you will be charged around 0.4% for an insurable turnover of AED 100m.
Insurance benefit only
In this case the business wishes only to secure its turnover by insuring their account receivables which generally represents a large part of its balance sheet. It knows its clients well, but wants to be prepared for the unexpected.
A possible solution here might be to go for an Excess of Loss policy which is offered by credit insurers such as AIG, Markel, QBE or Dubai Insurance, but this product is not designed for small businesses as you need to turnover a minimum of $50m.
What is an Excess of Loss solution?
The open account sales are also insured, but only the largest buyers which generally represent 70% of the turnover are financially assessed by the credit insurer. The remaining open sales are insured automatically through a DCL (discretionary credit limit) based on the credit management procedure of the policyholder. In addition, the credit limits are non-cancellable during the period of the contract which helps as credit insurers tend to deleverage their exposure during an economic downturn.
What is the cost?
The cost is cheaper than a Whole turnover solution, but there is always a deductible (ea. Aggregate First Loss) associated with the contract which is usually twice the amount of the DCL.
Working capital benefit
The business would like to raise more working capital from the banks. The best example would be a commodities trader with usually a low capital ratio which cannot grow its business without bank financing.
A solution might be to go for a trade finance policy which is offered by credit insurers such as risk underwriters from the Lloyd’s market, AIG, Markel or Dubai Insurance.
What is a trade finance policy?
The credit insurer covers the value of the financing facility that the bank grants to the business. The risk underwriter gives a credit limit based on the quality of the balance sheet of the business (called the obligor) and the underlying insured risk is not a commercial transaction but a financing transaction. The credit limit is non-cancellable and it can be syndicated between several risk underwriters in order to increase the insurance capacity.
What is the cost?
Credit insurers charge a premium on the maximum liability of the contract. Let’s take the example of a credit limit of $15m with a percentage indemnification of 50% which means that the maximum liability is $7.5m. In this case, the credit insurer would charge around 1.5% on the $7.5m.
There are of course other solutions for obtaining more working capital from bankers such as credit insuring one, several, or even all the buyers through a whole turnover policy. Then, the rights of the policy can be assigned to a bank through a loss payee who will discount the invoices depending on the credit limits granted by the insurer.
To conclude, the shopping experience for credit insurance in Dubai is improving thanks to a more competitive market which is driving down insurance premiums and increasing the range of products available.