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Five reasons an insurer is your best partner for surety bonds

October 19, 2022

Businesses bidding on new project opportunities whether international or local, large or small, complex or straightforward always seek to portray their capabilities and strengths in the best possible light. But no matter how glowing their track record and balance sheet, the project owners they are trying to impress invariably require a guarantee that the proposed work will be completed as agreed or, if not, appropriate compensation is paid. And not just at the bid stage: they often want end-to-end security around any advance payments made, overall performance, warranties and post-project maintenance.

That is where surety bonds and guarantees play a big role. By offering to financially guarantee that your company will fulfil the terms established in a bond, they bring confidence and high levels of trust to the relationship between you and the project owner, the beneficiary of the bond.

But whether they are provided by insurance companies, banks or facilitated by brokers (or a combination thereof), the different types of surety bonds and guarantees offer very different benefits and competitive advantages. These advantages can influence your margins on the project, the level of obligations you need to fulfil, your ability to bid for further opportunities, and more.

Here are five top reasons why insurers in particular make the best partners for companies looking to safeguard their projects with surety bonds.

1. Releasing liquidity

Surety bonds from insurers release greater liquidity for your company. By not using a bank facility, your existing bank credit lines are not stretched, and that typically frees up liquidity for other activities: to tender for further business, to invest in capital equipment, meet ongoing payment obligations, and more.

“As a financing alternative to bank guarantees, surety bonds can release working capital facilities with your bank,” says Robbert Langhorst, Global Head of Distribution Surety at Allianz Trade. Not every CFO or company director is aware of that alternative – or the benefits it brings. “While large companies with their own treasury departments may be well aware of how surety bonds help to maximize liquidity, that is not always the case with mid-sized companies,” he says.

However, it is not an either/or choice between banks and insurers. Langhorst points out that both banks and surety providers regularly partner up, especially when the client may have maxed out its borrowings from its preferred bank and would rather work with an insurer than bring in a second bank.

Robbert Langhorst,
Global Head of Distribution Surety at Allianz Trade

2. Appetite for greater risk 

An appetite for more risk is built into the DNA of insurance companies, argues Langhorst. A bank’s maximum guarantee capacity is usually based on a form of security (a mortgage, cash reserves, etc.) that will govern how much credit it is willing to extend to a contractor. In contrast, insurance-backed surety providers don’t require that kind of hard security; for an insurance company, security comes in the form of sharing the risk.

 “It’s what we do as insurance companies; we share risk,” says Langhorst. “So, if we are underwriting a project that requires a maximum bond capacity of, say, $100 million, we might split that with a co-surety partner. And that helps to leave scope for us to help support your next project and the one after that.”

3. International reach and local support

With global market intelligence and surety teams around the world, an insurer such as Allianz Trade is well placed to support your international projects through a combination of centrally managed capabilities and surety underwriters on the ground in the country where your project is taking place. By having direct access to local teams, your business is supported with deep knowledge of the country’s economic conditions, local contract language and its legal framework.

“Because of our local presence and the fact that we are solely focusing on supporting projects with sureties, we fully understand and can advise on all the technical aspects and the key milestones of your project,” says Langhorst. “That is reflected in the breadth of bonds that Allianz Trade issues: from a bid bond when the client is tendering for a new project, to advance payment bonds that give the project owner the confidence to fund the upfront purchase of materials, through to performance guarantees as a safety net in case things don’t go to plan.

“As a contractor, it is important you have a partner who is fully aware of the local conditions the legal challenges, the subtleties of contract wording, and the local market standards, all of which might influence your project. For example, if the conditions of a bond set by the project owner do not appear to be favorable for your company, then we speak the language to solve that not just the local language but the language of bond legislation, of negotiations, of claims.”

And that is valuable at every stage of the bond.

4. Longer project horizons

For a project that could run for several years, a surety bond from an insurer is likely to be the best approach. Banks are more inclined to issue guarantees up to five years; beyond that, such a long-term bank guarantee is likely to require extended due diligence, security and greater capital costs.

In contrast, an insurer such as Allianz Trade is happy to work with bonds that span up to eight years. And working with its reinsurance partners, bonds can be issued that last up to 15 years.

5. Benefiting from a stable credit rating

Insurance companies especially those with an international footprint typically have much more stable credit ratings than banks. By being able to point to an AA rating at a surety partner such as Allianz Trade, you can build trust and confidence with your client as you put a surety bond in place for a bid or to back project execution.

“An AA rating for the bond issuer brings comfort to a beneficiary, especially if you are a mid-sized company market that may not have a track record with the project owner or in the country where the project is based,” says Langhorst.

Indeed, he points out, public beneficiaries in some countries only accept guarantees from bond issuers with a high, stable credit rating. That is something contractors should watch out for in the bidding terms.

“From a client’s perspective, it is very frustrating for them to put in all the work to get the bond in place only to find that it is rejected by the beneficiary because the guarantor’s rating is simply not good enough,” he says.

It’s just another area where working with surety bonds from an insurance company can deliver business advantage.

How surety bonds and guarantees can support your business’s growth ambitions

Download your guide on how surety bonds from an insurer such as Allianz Trade can turn your project bond commitments into business advantages.