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Difficulty: MediumRole and Importance of Insurance in Business and Commerce

A haulage enterprise in Nigeria seeking a commercial bank loan to expand its truck fleet was required to provide comprehensive insurance cover for the vehicles before the funds were disbursed. Which of the following best explains how insurance facilitates credit creation in this commercial scenario?

  1. It enhances creditworthiness by safeguarding pledged collateral against loss or damage.Answer
  2. B
    It eliminates the physical occurrence of accidents and operational hazards during transport.
  3. C
    It guarantees pre-determined operational profits for the haulage business regardless of market conditions.
  4. D
    It transfers the primary obligation of repaying the bank loan from the firm to the insurer.

Answer

It enhances creditworthiness by safeguarding pledged collateral against loss or damage.
Insurance serves as an essential aid to business by facilitating credit procurement. By insuring assets pledged as security, the business guarantees that the lender will not lose financial backing if the asset is damaged, thereby boosting creditworthiness.

Step-by-Step Solution

1
Identify the key role of insurance illustrated in the scenario.
The scenario focuses on insurance as an aid to securing business credit and loan facilities.
When commercial firms borrow funds using tangible assets as collateral, financial institutions demand protection against asset destruction.
2
Analyze how insurance protects the financial institution's interest.
If the asset is damaged or lost, insurance indemnifies the loss, ensuring the security backing the loan remains intact.
This risk reduction encourages banks and creditors to extend financial credit to businesses.

Key Concept

Role of Insurance in Credit Procurement and Security of Collateral
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Topics

Role and Importance of Insurance in Business and Commerce

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