The use of sureties has grown steadily over the last decade as insurers have started to cover the banks’ guarantee business within their surety activities. GTR gathered together a group of underwriters and banks to provide an overview of why this kind of cover is increasingly sought after by banks and how the business is developing.

How do insurance companies use surety to co-operate with banks?

According to the International Credit Insurance & Surety Association (ICISA), a surety bond is “an agreement, issued by an insurance company, which (in most cases) provides for monetary compensation in case the principal fails to perform. Although many types of surety bonds exist, the two main categories are contract and commercial surety”.

In a relatively recent development, insurance companies, which for long have issued guarantees – mainly through the use of surety – have adapted the product to co-operate with banks.

As such, at the request of banks, the product has been transformed from a traditional surety to an on demand guarantee.

“It was a natural fit, when insurers started to cover the bank guarantee business within their surety activities,” says Silja Calac, senior surety underwriter at Swiss Re Corporate Solutions.

This on demand coverage is issued within the framework of article 15 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO), where suretyship is defined as “fidelity bonds, performance bonds, administration bonds, bail bonds or similar contracts of guarantee”.

“We are giving an on demand guarantee coverage to the banks and not a kind of conditional surety cover – that’s very important,” says Calac.



Roundtable participants:

  • Bill Backhouse, underwriting manager, surety, Tokio Marine HCC
  • Silja Calac, senior surety underwriter, Swiss Re Corporate Solutions (chair)
  • Ludovic Chérioux, underwriter surety Europe, Chubb
  • Romaric de Corbiere, head of syndicate, trade and insurance syndications, BNP Paribas
  • Boris Jaquet, Emea head, distribution and credit solutions, Deutsche Bank
  • Reinoud Le Coultre, head, FI trade portfolio management and distribution, ING Bank
  • Claudia Lopes, director, trade credit insurance – Emea and Americas, Standard Chartered
  • Shannon Manders, Editorial Director, GTR
  • Azman Noorani, head of surety, Swiss Re Corporate Solutions


Calac: Surety for banks has grown in popularity over the last two years. From close to nothing a few years ago, all of the insurers at the roundtable have since underwritten a non-negligible volume of surety transactions behind banks. How do you explain the sudden success of this kind of cover?

Noorani: In the last few years we have seen a very sharp uptick in the number of transactions that are being done. From Swiss Re Corporate Solutions’ perspective, I think there are a number of reasons.

Firstly, our corporate clients have become a lot more international and a lot more demanding in terms of the amount of capacity that they need and the jurisdictions where they need us to issue guarantees. Banks and insurance companies individually can do some of that business, but together, we have a lot more capacity, and we can issue bonds in a lot more jurisdictions. From our side at least, we don’t see these corporate clients coming to us normally, so it gives us access to them, and then we have a lot of capacity to offer, because we don’t deal with them already. I also believe that, from the banking side, this is a very efficient use of their capital to be able to share some of the surety risk to insurance companies, and at the same time they can increase business on some other facilities with the same corporate clients.

The second reason we see a lot more deals is that, as insurers, we had been a bit sceptical about dealing with banks, but this has changed. At Swiss Re Corporate Solutions, we have been dealing with banks on the trade finance side for about 20 years now, and we have only had good experiences. Obviously, the same people who deal with letters of credit also look at guarantees, so it is very natural to be in a position to underwrite the risk related to guarantees as well.

The third reason is that the distribution channel has really improved. The wordings have adopted to the standard participation agreements which banks are used to, and a couple of brokers have helped a lot in terms of getting the wordings ready and also helping us distribute amongst insurers.

Banks and insurance companies individually can do some of that business, but together, we have a lot more capacity.
Azman Noorani, Swiss Re Corporate Solutions

Bank syndication has been going on for a while, so there is a good process already set up, but insurance companies haven’t really done a lot of syndication amongst themselves. Brokers such as RKH and Marsh have brought in a lot of experience from the trade finance risk participation side and have really helped us to grow the business.

Jaquet: I would echo this. From my perspective, these are the main reasons why we’ve been using it moreand more for almost three years. It is a very flexible instrument, and, in our view, behaves much more like a bank product than an insurance product. In addition, not only is it a great tool to optimise capital allocation management, but it remains a very competitive de-risking instrument, which explains its growing popularity.

Chérioux: We have seen new entrants – including Chubb in Europe, of course. This might explain why there is a lot of appetite in Europe for good corporates and good credit risks. This has certainly helped various surety underwriters to allocate their capacity behind banks as well – because it’s a good way to take some risk on names that would otherwise not necessarily use sureties for direct bonding.

Backhouse: There is also the aspect of the business culture in different territories, where it may just be that for decades, the bank guarantee has been the instrument that beneficiaries have called for. Notwithstanding that the people around this table have got good ratings, it is very, very hard to convince people in certain territories that an insurance company guarantee is just as good as a bank guarantee. The culture is that they would just stick with what they are comfortable with. Certainly in the Far East and Australasia, the bank guarantee is the principal instrument, so to try and persuade owners to take our paper in those territories is very difficult.

This helps us facilitate what we want to do in those territories in a slightly easier fashion, so we can obviously work with some of the principals that are attractive to us, but have the relationships between the banks and those principals be maintained, and of course, the beneficiaries are still happy because they are still getting their bank guarantee. They have no idea that maybe 50% or 60% of it is then shared out into a non-bank environment, but that is of no concern to them, as long as they get their instruments of choice.

Calac: Have you seen other developments in the surety or guarantee business of banks, whether that’s other instruments being used or other regions becoming more or less interesting for our business?

Chérioux: There is perhaps a greater focus on the commercial guarantees than there used to be before. Also, from the surety underwriters’ side, typically we had construction business as the main user of bonds and guarantees; lately the surety underwriters shifted away from that and more towards commercial guarantees such as tax, customs or court guarantees. This is something that the banks have been doing for years and years, and where the surety providers have perhaps been late entrants: they still have difficulties entering these markets.

Backhouse: It’s probably still a small proportion of what we do, I accept that. As we’ve gone outside of our home market, which for us here in the UK is traditionally construction, we have started working with many more industries, because our focus has been on larger corporate clients. We’ve looked at aviation, defence, oil and gas and so on: it’s not just been a pure construction play outside of the UK.

It is a very flexible instrument, and, in our view, behaves much more like a bank product than an insurance product.
Boris Jaquet, Deutsche Bank

Noorani: The diversification into all the different risks has been a good thing. At Swiss Re Corporate Solutions, we primarily take traditional insurance risks such as property and casualty. Then you add in credit and when you diversify again within the credit we end up with a portfolio that is much broader than the usual consumer retail risk, from the trade credit side, commodity risk from our trade finance business, and construction risk from the surety side.

Jaquet: Rather than being driven by the need for diversification, we believe that the surety market is simply expanding to market demand.

Le Coultre: At ING we are used to the whole concept of insuring and distributing. We have been doing it for over 20 years on the FI trade side, but sharing it within the corporate trade area within our bank was an unknown concept. On the FI side, co-operation and reciprocity are the norm. We are now expanding the focus to the corporate side, and we see this developing slowly on an individual country and counterparty basis. We have to get people and risk management used to it. What we explain is that, based on the surety, you are actually able to increase your limits for the benefit of the client, the bank and its partner, the surety provider.

Lopes: At Standard Chartered we are also very much used to insurance on the corporate side, but it has always been much more on the whole portfolio turnover side, the trade credit side. And then, of course now, the ability for us to offload the risks to the surety market of our portfolio, not just of the bonds but also the guarantees, is definitely an added value.

Calac: What are the main differences between doing surety distribution to traditional trade credit or political risk insurance?

Lopes: Definitely the documentation. And you have an on-demand guarantee, so that is the biggest value added.

Jaquet: I agree with this. And given its proximity to a bank product, the internal decision-making process is much easier.

The ability for us to offload the risks to the surety market of our portfolio, not just of the bonds, but also the guarantees, is definitely an added value.
Claudia Lopes, Standard Chartered

Calac: Does it make it easier to get regulatory capital relief?

De Corbiere: It’s not only that; it’s about having the capacity to explain internally how the project is working. It is much easier to explain this when we compare it to what we are already doing when we are distributing risk to bank.

Jaquet: There is no specific regulatory capital relief attached to the use of surety when compared to any other similar de-risking instrument. Therefore we see the increased usage driven by the bank’s familiarity with the product.

Lopes: The execution is that simple that if I would come to you with a transaction, we can just execute right away. We don’t have to go through the discussion of the policy to check if it would be CRR-compliant and the likes; whereas if we put a bespoke policy in place it takes at least a month.

Calac: What about credit capacity? Does the surety distribution also achieve an increase in your credit capacity?

Le Coultre: Most often it does, but it depends on a case by case basis. It is a relatively new product and not everyone is familiar with its workings yet. We are actively sharing our knowledge about this product internally so that everyone is on par.

Jaquet: In just the same way as it is a recognised de-risking tool, surety helps us maximise what we can offer our clients.

De Corbiere: We mainly use surety to increase our credit limits – the pricing plays a part as well.

Calac: It’s interesting to hear that the banks use it in different ways. What about the obstacles? Are there factors that make it difficult to use surety?

Lopes: There are markets that it doesn’t cover. We struggle if we go outside the investment grade markets: that’s a challenge for us, because we are very much an emerging market bank.

Jaquet: It is a growing market, so it’s maybe just a question of time and people getting used to it. The only limitation we can see right now is that it is not yet open to all segments of the market.

Calac: Has anyone here at the table had any claims experience for surety transactions?

Jaquet: We have never encountered any claims to test its resilience so far, but we believe in surety and see no reason for concern.

Noorani: No claims, but there have been a couple of work out situations that have been a very good experience because we saw the bank in action working out the situation. They were on the ground, dealing with the client, trying to solve the problem, and in the end we didn’t have to pay anything. For the surety underwriters the work out is actually more important than just paying a claim.

Backhouse: We have had no claim situations thus far. From our side, it’s as important as it is for the banks when you’re choosing your partners in the surety market that we work with banks that we believe will truly take the position you have just described there and be very proactive in any kind of work out situation; somebody with strengths and true ability to steer that through.

Perhaps one of the other things that might restrict the banks in working with the surety providers is they may have limits on each surety, and often we are not aware of that as this information is not divulged. We each individually have our own limits, which are not insubstantial for individual risks and that would be no different in how we sit behind a bank on one of its customers. So for banks then to restrict a surety on the total capacity, it can be a bit restrictive because we’d obviously have a lot more capacity for one client or more clients that are over and above what banks’ own credit limits allow.

Lopes: That is definitely an ongoing discussion for us banks as well. It comes down to how each of the companies are assessed from a risk perspective.

Le Coultre: My company has over 100 MRPAs with banks but only six with insurance companies. So by nature, if things are really picking up, you are going to hit a ceiling somewhere soon. From that perspective we expect new entrants to the market or a totally different approach from a credit perspective on secondary risk.

No claims, but there have been a couple of work out situations that have been a very good experience because we saw the bank in action working out the situation.
Azman Noorani, Swiss Re Corporate Solutions

Calac: What is the experience of the insurers? If capacity requirements come from a bank and you already have your direct surety business, what do you do when this clashes?

Backhouse: We’ve seen no clash so far. If we were involved with a customer, we would naturally disclose to the bank that we already have some involvement. If we had spare capacity, we could consider making that available, but we haven’t seen any conflicts on that. We would have appetite for an individual case depending on our own criteria. It’s very much down to our own perspective on that risk.

Noorani: We have had a few clashes. It’s still very manageable, but probably in the next year or so we would have to think about looking at more external capacity from reinsurers. In some cases we really have to juggle this capacity we have. For example, if a bank comes to us from Europe on a corporate client which is also doing business with us in Australia and Brazil, we have to carefully consider that and look at different pricing as well. In different countries there are different kinds of wordings; in some countries, like Brazil, it is conditional wording, in Australia it’s on-demand wording, so what is the right price and who gets the capacity? This is a big decision that we have to make right now. It doesn’t happen a lot yet but it’s definitely something that we have to look at.

Jaquet: We are very selective in the choice of our partners. For us, it is more than merely testing a specific product, it is about the relationship with that product provider and trust is paramount given the risk of the potential competition vis a vis our end-client. Should that trust be tested in any way, we would want to terminate the relationship immediately.

De Corbiere: One of our main concerns when we first started to work with the surety was the confidentiality and potential competition. This was something that we had to understand and we had to review the internal setup of the sureties and see whether there was any potential conflict of interest. It is really important for us to be sure that there is no potential conflict between those two businesses, because at the end of the day, we would have the same clients, so we don’t want surety providers to use the information they are receiving from us to develop their own relationship.

Backhouse: As far as I am concerned in this business, trust is the absolute cornerstone of what we do. Without trust, there is no business, there is no client relationship, there’s nothing.

Calac: Do surety insurers prefer to do risk participation on a silent or disclosed basis?

Backhouse: I think it was unusual for us at first to be silent on some of these deals, because we really do like to go and kick the tyres, so to speak. This is why I think it was a little slow to build this up. We concentrated on the much larger corporates that people around this table are involved with, so we could at least see the public information quite regularly. But that was quite an unusual thing, not to be able to come back to our credit committees and say, yes, I’ve met this guy, and I think he’s okay. We just didn’t have that ability. But now that we’ve done several of those deals, I think that we are becoming more comfortable with it. We are beginning to see the credit reports, the internal notes, which obviously we don’t write on, but it’s just important to get a feel for what your thinking is. Some of the risks we are still active with, but there are some banks who are quite happy for us to be open. So that is fine. That is a little bit more traditional. But that was one of the challenges that we faced in the early days, just to get used to evaluating risk from a back seat position.

Chérioux: What was missing initially was all these soft factors that we would perceive by going to see a client, but now I think we are getting used to it. It will always be more difficult to underwrite private companies than public companies, however. And there are situations when we would prefer being behind a bank. In some case, for example, it is simple manpower. If we can’t afford to have a team of 50 people handling a lot of guarantee issuance, and if the bank and its clients are very happy doing that, we will be very happy to sit behind a bank and be in the back seat. If there was a situation where we would prefer to be direct with a client, we would let the bank know.

Noorani: At Swiss Re Corporate Solutions, being originally a reinsurance company, we are very used to what we call ‘underwriting the underwriter’. That is why I think we are very big on the trade finance side, and it made it easier for us to come in behind the bank on the sureties side. But, as we are a direct insurance company, it is natural that we want to cross sell. So, if the corporate client doesn’t know that we exist, how can we cross sell other insurance products? That is what is missing.

Additionally, sometimes the corporate clients, after we’ve done a deal with the bank, will come to us and ask if we have capacity for them, and we have to say no. But they can’t seem to understand why, and we can’t explain to them why.

It is actually very useful to work behind the bank. There are some corporates out there who are very demanding. They come to us, they want big capacity, and then they want bonds to be issued within a short period of time in small amounts, and you need a factory to be able to churn out those guarantees and bonds. It is very useful to be able to work behind a bank because operationally they are ready to do that. This is why we think it is worth the money to pay the commissions that we pay to the banks, because of all the processing power they have to do that for us.

We have relationships with the sureties as if they were an FI.
Claudia Lopes, Standard Chartered

Calac: Is it fair to say that, from an understanding viewpoint, the banks and surety insurers speak the same language?

Lopes: I think it goes back to documentation in that sense. We have relationships with the sureties as if they were an FI. So, for us, it is much easier to understand internally as well.

Jaquet: As discussed earlier, there is a greater understanding from banks about the way the product can be used, especially given the standardisation of its components and simplicity. This is true especially if you compare this with the traditional political risk insurance market where policies are still discussed on an ad hoc basis.

Chérioux: Sureties have been participating directly on guarantee facilities in the syndication market for a long time. Sureties have been involved in club deals for very large transactions, and they are on an open basis and on the same documentation. That is how we do the business. Whether you have a surety provider or a bank, it is just the same type of documentation. Now, sitting just behind, it doesn’t mean that we would do the underwriting differently.

Calac: Is it sometimes easier to speak to a bank than to the corporate customer in case of such a syndication?

Chérioux: Yes, and the rules are clear, because in the case of a syndicate, there would be a mandated bank forming a pool of bank and surety capacity on behalf of its clients.

Jaquet: Surety providers tend to be very close to the end client and therefore the turnaround time tends to be very fast. In addition, the surety providers have a thorough knowledge of their local markets. So, given all of this and the agreed standardisation of the surety product, communication is not an issue.

Backhouse: We need the lead-in time, but once we have approved a limit on a particular customer, then we can just accept it.

Generally, our principle is that we leave the bank in the driving seat.
Ludovic Chérioux, Chubb

Calac: Surety insurers feel comfortable with being silent behind the bank when they participate. What is the situation in the case of a claim or restructuring?

Chérioux: There is a call and a put option in the MPA on the bank’s and surety’s side to decide how to proceed in case of disagreement. But generally, our principle is that we leave the bank in the driving seat, because it is usually not the only exposure that they are going to have with a particular counterparty in this situation. Unless we had a major disagreement on the way to go forward, I think our role would be limited to only seeing how the restructuring is going, if there is one. But it’s good to have the option to get the asset assigned to us directly in case of a major disagreement, because I don’t think that banks would like us to start hindering what they would like to achieve.

Noorani: This is where having a retention makes a huge difference. In a claim or a work out situation in a faraway country, where we have nobody who understands that market, a bank can have people down there who can confront the situation on the ground with the client and fix the problem. We couldn’t do that. This is where the trust comes in. You need to trust that the bank can solve the issues in those countries where they have issued guarantees, where we don’t have people on the ground.

Calac: Is it important that the bank has a non-negligible retention?

Noorani: If the bank doesn’t take a retention, then we see it just as a fronting arrangement, which is a different relationship. They just provide the service, and that’s it.

Lopes: Yes, but we could also go back to the surety provider and say, we may not have a big retention on that particular deal, but we do have an overall relationship with the client. And we have a much larger retention there.

Calac: For the insurers, how big a percentage, approximately, of your total sureties is surety for banks?

Backhouse: It is now reported separately in our monthly management meetings, so in that sense, it is significant.

Noorani: It is to the extent that we have our own team dealing with it. It is very important. The challenge for us is to make it more sustainable. We are not only going for single transactions; we want to see long-term facilities. We want to see a nice volume coming in every year.