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Difficulty: HardRole and Importance of Insurance in Business and Commerce

An agricultural exporting firm intends to extend credit terms to newly acquired foreign buyers, but management is concerned about potential financial losses resulting from buyer insolvency or delayed payments. Which role of insurance most directly facilitates this commercial expansion while protecting the firm's working capital?

  1. Providing credit insurance to protect against bad debts, thereby maintaining business solvency and confidence in tradeAnswer
  2. B
    Applying the principle of indemnity to guarantee predetermined profit margins despite international market price fluctuations
  3. C
    Arranging reinsurance on behalf of foreign buyers to transfer all speculative commercial risks to primary insurers
  4. D
    Offering direct commercial services by taking legal title to exported commodities throughout transit

Answer

Providing credit insurance to protect against bad debts, thereby maintaining business solvency and confidence in trade
The option selecting 'Providing credit insurance to protect against bad debts...' correctly identifies the primary role of insurance in credit trade. Credit insurance protects businesses against financial loss caused by default or insolvency of buyers, thereby safeguarding working capital, restoring confidence, and enabling firms to expand sales on credit terms.

Step-by-Step Solution

1
Identify the core commercial problem presented in the scenario.
The exporter faces pure credit risk (buyer default/insolvency) when offering credit terms in trade.
Granting credit increases turnover but exposes working capital to non-payment risk.
2
Analyze how insurance functions as an aid/auxiliary to trade in credit transactions.
Credit insurance indemnifies sellers against unrecoverable trade debts.
By transferring default risks to an insurer, businesses gain confidence to trade on credit and expand market reach.
3
Evaluate distractors against fundamental insurance principles.
Options promising profit guarantees, misinterpreting reinsurance, or treating insurers as direct owners are conceptually invalid.
Insurance covers pure risk, not speculative market risks or profit guarantees, and operates as a financial auxiliary rather than taking title to cargo.

Key Concept

Role of Insurance in Facilitating Credit and Business Continuity
Estimated Time:2m 0s
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Topics

Role and Importance of Insurance in Business and Commerce

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