Surety & Guarantee
Research shows that many organisations solely utilise their bank to provide bonds and guarantees without fully appreciating that such products can also be obtained via the surety market.
A surety bond is a financial instrument through which an insurance company guarantees the successful performance of an Aon client to a third party, known as a beneficiary or employer. It is a written agreement that provides compensation in the event that specified obligations are not performed within a stated period.
Companies are taking advantage of surety facilities as either their sole provider of bonds or as a complementary part of their bonding arrangements. Companies are recognising that generally, bonds provided by a surety company are unsecured, thereby releasing valuable working capital facilities.
Surety bonds can be used in a variety of sectors including:
- Support services
What are the Benefits of Surety?
Surety helps facilitate two parties to enter a contract by guaranteeing the contractual obligations of the principal. Bonds issued via the surety market are typically conditionally worded, which affords the principal some protection through contract conditions.
Rather than using bank facilities, the surety market taps into an alternate source of capacity from the insurance sector.
A reduced need for tangible security helps a business free up working capital and credit facilities with off-balance-sheet solutions.
There are potential advantages with competitive premium rates compared with utilising banks.
Additional support is available from the surety company if a claim is disputed.
Why use a Specialist Surety Broker?
A surety broker can provide professional advice and has the ability to source bespoke bonding and guarantee solutions both domestically and internationally.
Having long-standing relationships with regulated surety underwriters, a broker can obtain competitive terms and premiums for a one-off bond, a new bonding facility or to arrange additional capacity if required.
Specialists are able to provide expert advice on a wide range of bond wordings with a view to protecting clients as far as possible.
Using a specialist surety broker also helps to drive the most competitive terms and ensure that risks are presented in the best way.
What is the Underwriting Process/Criteria?
Sureties generally look to underwrite risk with a zero-loss mentality; their potential losses stem from principal insolvency. With this in mind, underwriter criteria for risk largely centres around the applicant’s credit strength, and the underlying obligations of the guarantee comparative to the strength of the applicant. An initial review of a bond enquiry would focus on the applicant’s historic trading performance, balance sheet strength and an outline of the contract to be bonded.
Once we have secured sufficient information to make a submission to the market, we would approach suitable sureties based on the type and level of support required. From here, terms would be formalised with any additional due diligence required by underwriters, and the surety’s security would be put in place. This would typically be in the form of a group counter indemnity which allows a route to recovery for the surety, should there be any claims on live bonds. It is important to remember that surety is not an insurance product in that there is no transferral of risk. All sureties issue bonds on a recourse basis.