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Evolution of the Surety Bond market
Hungary 15 years
Dr. György Lampert
Managing Director – Eurobond
FILE 2016022
Stone AGE - 2002
Absolute discrimination in legislation against insurance
companies
„Security can be provided in a form of cash deposit or bank
guarantee”
Bank market (45 banks in Hungary)
Only exceptions: Travel Bond, IATA Bond
2
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Medieval AGE - 2002-2006
2002 Set up EuroBond as a principal Agent of Groupama
/Strong professional support from reinsurer ZURICH Germany/
Vision: introduce surety bond product in Hungary
Lobbying to change legislation and create the bond market
Change CFO’s mind: discover the difference!!!
3
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Medieval AGE - 2002 -2006
Discrimination damages the market & competition:
CAN I HELP YOU?
Competition Authority
Practice of Western European countries (Hungary joined the EU in
2004)
ICISA
ICC, Association of Hungarian Insurance Companies, Constructors
Association
Large corporate
Philosophy: Insurers just follow the needs of above players…
4
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Medieval AGE - 2002-2006
Insurer is equivalent to Bank
Insurance contract vs. Bond
Guarantee vs. Suretyship
Classical Suretyship vs. On demand suretyship
Customs 2004 vs. Excise 2005
New legislations accept surety bond similar to bank guarantee:
Customs (2004); Excise (2005); EU Subsidy (2005); Public Procurement
(2006)
5
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New AGE - 2007
Bond / guarantee market Insurer Bank
USA: 100% 0%
Italy: 80% 20%
UK: 60% 40%
Germany: 15% 85 %
Hungary: 4% 96%
2015:
Hungary: 15% 85%
Total Hungarian market in premium: ~ € 43 million
40 banks vs. Eurobond
6
Subsidy bond product
cancelled – 2012
Advance payment bond
20%
20% + 10%
Up to 50%
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Global AGE with Eurobond
Multiple agency
One of the largest, specialized, “surety only” agent in the region
Licensed for all EU countries
Focus on CEE region - Hungary (market leader with ~80% market
share), Poland Czech Rep., Slovakia, Romania
Started to operate in late 2002 (Founded by Ex-Zurich colleagues)
Budapest seat, Warsaw branch office
Doing all kind of bonds (except financial guarantees)
Professional team with special market/product knowledge
7
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Your CEE Partner 8
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EuroBond – in numbers I. 9
0,64 0,96
1,64 2,01
1,76
2,28
6,06
7,08
6,32
-
1,00
2,00
3,00
4,00
5,00
6,00
7,00
8,00
2007 2008 2009 2010 2011 2012 2013 2014 2015
GW
P
GWP 2007-2015 (m EUR)
17,90%
0,00%
10,00%
20,00%
30,00%
40,00%
50,00%
60,00%
70,00%
80,00%
90,00%
100,00%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Claims
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EuroBond – in numbers II. 10
311 292
380
593 569
589
-
100
200
300
400
500
600
700
2010 2011 2012 2013 2014 2015
Nr
of b
on
ds
Number of issued bonds*
*new issuances (existing bonds not included)
352,0 ; 42%
24,2 ; 3%
0,1 ; 0% 9,5 ; 1%
132,2 ; 16%
4,4 ; 0%
203,6 ; 24%
14,2 ; 2% 97,9 ; 12%
Share of bond portfolio (2015)
Advance Payment Bid Customs
Excise Maintenance Payment
Performance Subsidy Other
Total in EUR: 838m
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Services and geographical areas
We do…
Consultative surety services
Marketing and acquisition activites, focus on Mid and Large Corporates
Client relationship management
Risk assessment (complex risk referrals for insurers)
Contract management, complex legal solutions
Bond issuance, invoicing
Reporting for insurers and Financial Authority
Claims handling
Where…
CEE – Hungary (head office), Poland (branch office), Romania, Slovakia, Czech Rep.,
EU: Portugal, Spain, Austria, Italy, Netherlands, Germany, UK.
11
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Market potential 2014 - 2020 12
Market is boosted by EU funds
total EUR 453k million for the
whole period
Poland’s share is by far the
largest
Top3: PL 20%; IT: 10%; ES: 8%
Hungary: EUR 22k million
FILE 2016022
Bonding in CEE - Good to knows
Insurance Premium Tax (IPT) Rules - implemented in 2013
- Tax rate is 10 %
- Progressive tax rates are applicable to insurance companies with less than 8 billion HUF insurance premium income per year:
2,5 % up to 100 million HUF tax base
5 % between 100 million and 700 million HUF tax base
10 % over 700 million HUF tax base (above referred tax base is the gross insurance premium per month)
- Tax return and payment are the liabilities of the insurance companies on a monthly basis posteriorly
- IPT will apply only to risks located in Hungary
13
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Bonding in CEE - Good to knows
Unfair calling:
According to Civil Code:
Forged document
After Completion
Intentional behavior prevented the performance of obligation
The obligation that has been declared annulled by court decision
Provisional measures („Ideiglenes Intézkedés”)
Performance Certification Board („Teljesítésigazolási Szakértői Szerv – TSZSZ”)
14
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Operation of Performance Certification Board
(„Teljesítésigazolási Szakértői Szerv – TSZSZ”)
I. Authority:
Design and construction works
Only Hungary
Public procurements and private investments
Both Bank guarantees and Insurance bonds
Decisions about only technical and not legal issues
15 Bonding in CEE - Good to knows
FILE 2016022
II. Proceedure:
Initiated by general contractor, subcontractor, designer,
beneficiary
30 days (optional +30 days extension)
Call of the bond received
Insurer informs the Principal (3 working days)
Application to TSZSZ (3 wd) / compulsory extension of the Bond
Decision about the initiation of the process
Inspection on site
Expert’s judgment
On the basis of the expert’s judgment the calling is fulfilled or not by
the Insurer
16 Bonding in CEE - Good to knows
FILE 2016022
Exclusions vs. bond wordings I.
Exclusions „container”: classes of business (Fidelity); subclasses (fin.
guarantees); risk classes (war), etc.
Problem: How to enforce them by Insurers?
Option „A” bond wordings
Option „B” insurance contracts
Option „C” underlying contracts between principals and beneficiaries
IF none is working Insurer may invoke the applicable laws to be released from its liability
What about Re-Insurers?
In an easier situation, no need to pay according to the re-insurance treaty
Result: the Insurer will have a „GAP”
17 Bonding in CEE - Good to knows
FILE 2016022
Exclusions vs. Bond wordings II. Hungarian civil code about exemptions from liability
„circumstances which are out of scope of control”
Traditional force majors and natural disasters (earthquake, fire, frost, strom, thunder…)
Certain political events (war, riot, revolution, sabotage…)
Certain acts of the state ( ban on import/export, embargo, boycott, FX restrictions…)
Radical market changes (price explosion, unusual FX change…)
Insurer is released from liability only if the above circumstances are both
Unforseeable by the party breaching the contract at the time of concluding the contract AND
It was not reasonable to expect from the party breaching the contract to prevent such damage or to avoid such circumstances
18 Bonding in CEE - Good to knows
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Poland „cumulated” maturity – Can you cover it?
Performance and maintenance bonds may be combined in one document
- however still separate instruments from legal perspective
guarantee term is technically divided into two phases – performance (up to
5y) and warranty stage (up to additional 4y)
100% of the guaranteed sum for the performance stage and usually 30% for
the warranty period (sometimes 1st year 30%, 2nd year 20%, 3rd year 10% …)
19 Bonding in CEE - Good to knows
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Our contact
HUNGARY
1111 Budapest, Budafoki út 59.
Tel: + 36 1 796 3508 + 36 1 202 0038 Fax: + 36 1 202 0674
POLAND
ul. Dantyszka 20, lok. 31/32, Warsaw (02-054)
Tel: + 48 796 950 551
www.eurobond.hu www.eurobondint.com
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