Surety insurance protects your projects

Clients want security for their projects. With surety insurance, companies meet their bond obligation and still retain financial freedom.

‘When you can’t trust a person, then a contract is useless.’ Oil tycoon Jean Paul Getty pinpointed the foundation of all business relationships: trust. But clients and contractors increasingly do not know each other personally – be that because the number of potential trading partners is rising due to increasing competition, the business relationship is still new or the client and contractor operate on different continents. When the client does not know its potential partner well, it cannot assess the quality and reliability of that partner. The client wants to avoid the risk of financial loss or inadequate service – especially when the transaction in question is big.

‘Specific bonds are increasingly being sought out, such as waste shipment or customs bonds.’

Sebastian Kentenich, Head of Credit at Funk

A guarantor with unquestionable creditworthiness can overcome this potential obstacle to business. Instead of providing an amount of money, the guarantor puts forward its own creditworthiness. Sebastian Kentenich, Head of Credit Insurance at Funk, shares his knowledge: ‘Many industrial and commercial companies still only allocate the majority of their contracts with bonds that protect the performance of the contract or the warranty. Public procurement clients are even legally required to ensure that every allocated contract is subject to recoverable bonds. What’s more, specific bonds are increasingly being sought out, such as waste shipment or customs bonds.’ 

Many companies are still limited to their main bank when it comes to issuing bonds. This can have negative implications when banks count the bonds issued for their customers towards the entire credit limit, treating them like other forms of credit. As a result, what would be the positive liquidity effect of an advance payment, for example, may be radically reduced. With surety insurance, the insurance companies take on the contractor’s liability toward the client by issuing a bond certificate. The contractor’s credit line remains untouched as a result, leaving it the financial freedom to make other investments, for example. Insurance companies are also subject to less strict requirements for capital than banks. It is therefore easier for them to issue bonds.

 

Expertise in the field of surety insurance

Funk advises companies and also works with surety broker Gracher, which specialises in surety insurance, in order to ensure that companies get the optimal conditions for their surety contracts. ‘What’s important is, for example, to respond accordingly to changes to creditworthiness,’ says Kentenich. To identify such changes in time, it is a good idea to have a look at the balance sheet each year and review credit and bond contracts. In doing so, you should look not just at the individual bond contracts but also at the entire credit and surety portfolio and harmonise all of the components therein. For example, if companies are already working with other creditors and surety insurers, this must be taken into account. Companies generally have to inform their creditors of business developments and important facts. These include all lines of credit and surety and the respective utilisation of these lines. The creditor can also connect certain obligations to its allocated credit – such as insisting that credit securities are not given to other creditors. If one of these requirements is violated, the creditor can withdraw its allocated credit. Companies should therefore keep an eye on reporting obligations and covenants. As Kentenich says, ‘If you have different obligations to each insurer, mistakes will be made. We make sure that obligations and covenants do not conflict.’ International companies also need cross-border support. Clients from non-EU countries in particular often rely on bonds in their own countries. Thanks to the Funk Alliance network, Funk can offer on-site support for its clients to obtain surety insurance worldwide, which can then be reinsured in Germany.

 

21/08/2019

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Sebastian Kentenich
+49 40 35914-0
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