When companies need a guarantee, they often turn to their bank. And whilst this may seem to be the simplest approach, decision-makers should understand the other options available to them—mainly purchasing surety from an insurance company. One key reason? To free up liquidity.
When companies obtain a guarantee from an insurance company, they don’t use up any of the limits under their bank lines, giving them additional credit to use in other ways to support their business. Often, insurance companies have better credit ratings than banks, a key factor when getting clients to accept guarantees. Two examples of guarantees that can free up cash include pension bonds and payment services regulation bonds.
Pension guarantees ensure that a corporation’s pension scheme is being funded, whilst at the same time deferring the actual cash payments. When a business chooses an insurance company for this type of guarantee instead of a bank, it keeps its credit lines available with its bank and frees up the cash it may have had to put into the scheme, keeping cash in the business. Additionally, if the company becomes insolvent, the surety company will ensure appropriate payments into the scheme—maintaining exactly the same protection for employees. Per recent legislation, directors could soon be liable if they take the appropriate steps to protect their employees’ pension plans.
Payment services regulation guarantees, similar to money transmitter bonds in the U.S., are needed primarily by financial and technology companies that process people’s money (e.g., PayPal, Worldpay). This type of guarantee allows any guaranteed funds to be exempt from the requirement to be ring-fenced from the companies’ own cash, increasing the companies’ working capital and supporting their business. Similar to a pension bond, it also protects customers should the companies become insolvent and puts them in the same position as they would otherwise have been in.
In addition to enhancing liquidity, another reason companies should consider a guarantee from an insurance company is spread of risk. Historically banks and insurance companies haven’t always been on the same economic cycle. Should there be a recession, or the banking market is having trouble, an insurance company may not necessarily be experiencing the same challenges at the same time as the bank. Having a mix of bank and surety providers allows your business to grow.
And yet another reason to work with an insurance company to obtain your guarantees is that insurance companies can provide value that businesses don’t get from a bank. Insurance companies employ a robust underwriting process and will look to provide feedback and advice regarding risk mitigation, whereas banks are primarily only examining credit. This provides another layer of risk protection for a business.
When looking for a surety partner don’t underestimate the value of the relationship. You and your client want a company committed to the surety market—a company that will be with you in good times and bad and will stand with your client for the long term. Make sure the company your client is doing business with has strong financial ratings and the capacity to provide large bond programs as your client’s company grows.
This website is general in nature, and is provided as a courtesy to you. Information is accurate to the best of Liberty Mutual’s knowledge, but companies and individuals should not rely on it to prevent and mitigate all risks as an explanation of coverage or benefits under an insurance policy. Consult your professional advisor regarding your particular facts and circumstance. By citing external authorities or linking to other websites, Liberty Mutual is not endorsing them.
Liberty Mutual Surety is a trading name of the Liberty Mutual Insurance Group.