So the insurers advanced
There are a number of reasons for the 'advance' of insurers compared to banks:
- Banks fall under the so-called Basel III supervisory regime and insurers fall under the Solvency II supervisory framework (see also the explanation below this list).
- The ratings of banks are on average lower than those of insurers.
- The international branch network of banks has virtually disappeared since the banking crisis.
- The guarantee facilities via an insurer are in principle not deducted from the credit facility. This does happen at a bank. There are no restrictions on working capital for insurers.
Because a number of banks were in danger of collapsing during the banking crisis (2008-2011), new requirements were imposed with regard to the solvency of a bank. The Basel standards that apply to this have been tightened, with the result that: more capital must be maintained for outstanding obligations (including guarantees). Insurers fall under the so-called Solvency legislation. Here are the requirements less strict than the Basel standards.
The insurance world saw opportunities and so they entered the financial guarantee market. They did so in rapid succession; in the Netherlands the number of providers increased rapidly. Parallel to this development, recipients of guarantees started receiving sureties from insurers increasingly acceptable find. This was partly due to the increasingly improving rating of insurers. An additional advantage of insurers is that they often have a more extensive branch network abroad to have. This allows them to issue local guarantees in countries that require this.
Common forms of guarantees
There are different forms of guarantees. We list the most common forms for you below and explain them using practical examples.
- Offer/Enrollment Guarantees;
- Advance payment guarantees;
- Performance guarantees;
- Maintenance guarantees.
Furthermore, there are specific guarantees that occur in the market, including:
5. Customs guarantees;
6. Rental guarantees.
This is how guarantees work in practice
- Offer/Enrollment Guarantees
This guarantee is intended to provide the client with clarity about the quality of the tenderers.
Practical example:
A few years ago, the government of Bangladesh issued a tender for the supply of temporary power supply. Based on the specifications, it quickly became clear that a large number of generating sets were involved (at least 50). Ultimately, more than 100 companies registered. These turned out to be mainly local companies, which, for example, owned only one generating set. The tender was withdrawn and re-issued, with the requirement that a offer/registration guarantee was issued $250.000. The result: only four (high-quality) parties registered.
- Advance payment guarantee
A contract for the supply of capital goods, for example, generally includes a payment schedule. For example, 30% upon acceptance of the order, 50% upon a certain milestone and 20% upon delivery of the project/good. The so-called 30% down payment is intended to provide the contractor of the contract with the opportunity to purchase the necessary materials.
Practical example:
A shipyard takes an order to build a ship. Special steel and equipment/motors must be purchased for this construction. In principle, the shipyard can use the down payment to finance the purchase. The client requests a deposit for this down payment prepayment guarantee. After all, he wants to be sure that the money is also used for that purpose. If not, the client will reclaim the money through the guarantee.
- Performance guarantee
Multiple payments will be made during the project (50% in the example above). The client wants to know whether the project is progressing and being executed according to plan. Check moments are also recorded so that he can monitor this.
Practical example:
The shipyard receives a follow-up payment when the hull of the ship is ready and when the ship is launched. In return for this payment(s), the client will: performance guarantee questions.
- Maintenance warranty
After the machine or project has been delivered, the client wants to be assured that it meets the previously prescribed specifications and performance. If this is not the case, the contractor must solve this. The client often requires one for this Maintenance warrantyso that he can be sure that this will happen within a certain time.
Practical example:
A Dutch contractor is building a factory in Egypt to produce insulation boards made from straw waste. The specifications stipulate that the factory has a production rate of 90%, 24 hours a day, 6 days a week. 10% is intended for maintenance and contingencies. Two months after delivery, the production level is only 50%, because the process regularly has to be stopped due to malfunctions. If this is not resolved within a certain time, the client will be maintenance warranty claim.
- Customs guarantee
In principle, these guarantees always occur when there are excise goods and they have to be submitted to customs (Tax Authorities).
Practical example: An alcohol producer stores large quantities of alcohol via an external terminal. Alcohol carries a significant percentage of excise duty that is paid as soon as the alcohol comes into circulation. Until then, the owner must have a customs guarantee to the tax authorities for the value of the total amount of the excise duty. This is to prevent alcohol from entering into circulation without excise duty.
- Rental guarantee
One of the most well-known forms of guarantee where the rental payment of real estate is guaranteed for a certain period. This form is generally more difficult, because the term is often 5 to 10 years.
Tips for working with warranties
In addition to an explanation of the market with regard to financial guarantees and an outline of the different types of guarantees, we would like to give you a number of tips for working with guarantees:
- When accepting an order, check carefully whether there is sufficient guarantee facility/working capital is to fulfill the obligations of the contract.
- Insurers basically provide no individual guarantees but facilities.
- The minimum facility provided by an insurer is approx €2 million (whatever the need is).
- Do not wait until the bank refuses a guarantee facility/extension. The insurer would rather not be the 'last resort'.
Would you like more information about guarantee facilities through insurers? Please contact the specialists at Xolv or view our special page about Guarantees.
