The benefits of surety bonds

Jens Krichbaum, head of surety Germany for Tokio Marine HCC, talks about the benefits of surety bonds as an alternative to bank guarantees

What exactly is surety? While Tokio Marine HCC is famous as a global, specialty insurance company, insurance isn’t the only product we sell. We have many strings to our bow and one of them is surety, the equivalent of a bank guarantee.

These products mean we can provide our clients with a credit instrument called a surety bond or a guarantee which guarantees that a company will fulfil its contractual obligations to a third party, also known as the beneficiary. It means that while the client is ultimately responsible for the cost of any incomplete or delayed works, the beneficiary is secure in the knowledge that they will receive speedy recompense. The guarantee we provide is as good as anything a bank can issue – it provides the same level of guarantee while keeping the client’s traditional banking credit lines free for other uses.

What kinds of companies use surety bonds? All sorts of companies take advantage of the flexibility that surety bonds provide but in the main, Tokio Marine HCC works with large construction companies and contractors, but we also work with many international capital good producers and also companies that need to fulfil duty-excise such as oil and lubricant storage.

We can issue guarantees and (surety) bonds in favour of public authorities for duties, licenses, tenders, procurement, taxes and contractual obligations all across the world. Normally we work with companies that have a turnover of more than €50m, up to large and listed corporates.

Why should I use an insurance company instead of a bank? Surety bonds play a key role in the well-structured financing mix for an organisation. Companies are always looking for ways to optimise their banking facilities, security and collateral package and surety bonds help to streamline and optimise those credit facilities.

Ensuring that the full value of a surety bond is realised requires a high degree of underwriting expertise and local market knowledge. Tokio Marine HCC has been issuing surety bonds since 1982 and we provide them throughout Europe (UK, Ireland, France, Denmark, Benelux, Germany, Italy and Spain), as well as in Australia, the United States, Mexico and Brazil. We can also assist in fronting through our Tokio Marine offices globally.

Why use Tokio Marine HCC? The financial security that sits behind any surety bond is crucial and being a member of the Tokio Marine Group ensures that we benefit from a Standard & Poor’s A+ rating combined with a very international global footprint. The Tokio Marine Group of companies is one of the largest insurance groups in the world and operates in 47 countries and employs 40,000 people. Doing business with us provides clients with access to the highest quality products and services, as well as the safety and security of a trusted long-term partnership.

What does a surety underwriter do? Similar to an insurance underwriter, a surety underwriter’s main responsibility is to understand the risks posed by issuing the bond. Our underwriters are specialised in analysing the financials and strategy of a company as well as the legal expertise of the underlying contracts.

The underwriting covers a range of things such as analysing the annual reports, verifying the forward-looking budgets and understanding the liquidity of our clients and ideally, this is not a one-off process. The best clients are those who engage directly with us and keep us updated on the financial health of the business. This allows our underwriters to ensure that the surety bond remains fit for purpose and is providing the protection the end client requires.

How do potential clients secure a surety bond with Tokio Marine HCC? It’s all about relationships from start to finish. Normally, the first point of contact with the client is an introduction which often comes through a specialised surety broker, but we also work with many clients directly.

Usually, we have an introductory meeting with the CFO, treasurer or group controller to understand the details of the financials and after a short evaluation we can set up a facility that can be used for all group companies.