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Chuks Udo Okonta
The President/Chief Executive, Dangote Group, Aliko Dangote, has decried the lack of credit insurance products in the country.
Credit insurance is an insurance policy and a risk management product offered by private insurance companies and governmental export credit agencies to business entities wishing to protect their accounts receivable from loss due to credit risks such as protracted default, insolvency or bankruptcy.
Dangote, who spoke at the first interactive session with major consumers of insurance products and services organised by the National Insurance Commission (NAICOM) in Lagos, also expressed worries over the size of insurance companies in country, whilst calling for Pal Africa coverage.
Speaking on the topic, Issues and Challenges of Consumers in the Management of their Portfolios’ Dangote, who was represented by the Group Chief Risk & Insurance Officer/Group Chief Procurement Officer, Dangote Industries Limited, Dr. Adenike Fajemirokun, lamented that there is no product that cover credit insurance in Nigeria, as obtained in other climes where it operates.
He called on insurance companies to build up capacity on risk management to enable them provide facilities to his firms manage risks. “They should have professionals that should guide us on how to manage our risks,” he added.
He also demanded for adequate distribution channels. “We want to extend insurance coverage to some of our staff and customers but there is no distribution channel to do this,” he said.
This medium sought to know while firms are not offering such a product and interviewed one of the Insurance Companies Managing Directors, who attributed the failure to low state of development of the industry and economy.
According to him, such products are backed with collateral, stressing that the insincerity exhibited by some business owners makes it difficult for insurers to venture into such risks.
Trade credit insurance, business credit insurance, export credit insurance, or credit insurance is an insurance policy and a risk management product offered by private insurance companies and governmental export credit agencies to business entities wishing to protect their accounts receivable from loss due to credit risks such as protracted default, insolvency or bankruptcy.
This insurance product is a type of property and casualty insurance, and should not be confused with such products as credit life or credit disability insurance, which individuals obtain to protect against the risk of loss of income needed to pay debts. Trade credit insurance can include a component of political risk insurance which is offered by the same insurers to insure the risk of non-payment by foreign buyers due to currency issues, political unrest, expropriation etc.
This points to the major role trade credit insurance plays in facilitating international trade. Trade credit is offered by vendors to their customers as an alternative to prepayment or cash on delivery terms, providing time for the customer to generate income from sales to pay for the product or service. This requires the vendor to assume non-payment risk. In a local or domestic situation as well as in an export transaction, the risk increases when laws, customs communications and customer’s reputation are not fully understood. In addition to increased risk of non-payment, international trade presents the problem of the time between product shipment and its availability for sale.
The account receivable is like a loan and represents capital invested, and often borrowed, by the vendor. But this is not a secure asset until it is paid. If the customer’s debt is credit insured the large, risky asset becomes more secure, like an insured building. This asset may then be viewed as collateral by lending institutions and a loan based upon it used to defray the expenses of the transaction and to produce more product. Trade credit insurance is, therefore, a trade finance tool.
Trade credit insurance is purchased by business entities to insure their accounts receivable from loss due to the insolvency of the debtors. The product is not available to individuals. The cost (premium) for this is usually charged monthly, and are calculated as a percentage of sales for that month or as a percentage of all outstanding receivables.
Trade credit insurance usually covers a portfolio of buyers and pays an agreed percentage of an invoice or receivable that remains unpaid as a result of protracted default, insolvency or bankruptcy. Policy holders must apply a credit limit on each of their buyers for the sales to that buyer to be insured. The premium rate reflects the average credit risk of the insured portfolio of buyers. In addition, credit insurance can also cover single transactions or trade with only one buyer.
Trade credit insurance was born at the end of the nineteenth century, but it was mostly developed in Western Europe between the First and Second World Wars. Several companies were founded in many countries; some of them also managed the political risks of export on behalf of their state.