SURVEY ICISA 2013

CONDITIONAL BONDS /ON DEMAND GUARANTEES

Findings of the survey FILE2013101

Content

1. Objective of the survey

2. Terminology: Conditional Bonds / On Demand Guarantees

3. Participation

4. Main findings

5. Discussion on further steps

1. Objective of the survey

The topic was first raised in the autumn meetings 2012 of the Surety Committee

“Members will be invited to comment if they issue guarantees under the uniform Rules for Demand

Guarantees (URDG 758), and if so, in which cases. Members will also be asked for their opinion on URDG

758 and to reply to the following questions:

Are the URDG 758 in general accepted by beneficiaries?

Should ICISA promote the use of URDG 758?”

Objective of the survey:

Getting a clearer view of the usage of and experience with both products by the member

companies.

Finding out the member´s view on the question if ICISA should promote the Uniform Rules

for Contract Bonds (URCB) and / or the Uniform Rules for On Demand Guarantees

(URDG) from the International Chamber of Commerce? 3

2. Terminology: Conditional Bonds / On Demand Guarantees

General confusion on the interpretation of the concepts.

The concepts conditional bonds / on demand guarantees for the purpose of the survey:

On Demand Guarantees:

“On Demand Guarantees” are abstract /autonomous (unconditional). The obligation of the

Guarantor is not accessory to the obligations between Principal and Beneficiary, i.e it is

independent from the underlying contract or legal / regulatory obligation.

Uniform Rules for Demand Guarantees (URDG) of the International Chamber of Commerce

(ICC).

The URDG are widespread and are regularly applied especially in international business.

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>>2. Terminology: Conditional Bonds / On Demand Guarantees

Conditional bonds:

Conditional Bonds are accessory (= conditional) to the main contractual, legal, regulatory

obligations between Beneficiary and Principal, i.e. the existence of the responsibility of the

Surety depends on the existence of an underlying obligation

Uniform Rules for Contract Bonds (URCB) of the International Chamber of Commerce (ICC).

Interesting: 26,1 % of the respondents did not know the Uniform Rules on Contract Bonds

(URCB) of the ICC!!

The URCB have not been as successful as the URDG and seem to have fallen into oblivion.

They are very seldom used.

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3. Participation

18 members of the Surety Committee responded to the survey

Participants from 21 countries from several continents.

No Participants from Latin-America Probably this has to do with the fact that PASA is

developing its own questionnaire The first objective was to coordinate the questionnaire

Close contact with PASA (they received our questionnaire) -> However finally it was decided

to go ahead with an own questionnaire in order to have results already for the autumn

meeting of the Surety Committee of ICISA.

In the development of the questionnaire participated the Topic Network Surety of Munich Re

(due to time pressure) + input from primary insurer side by Nationale Borg, Paul Daas and

Bjorn Eding.

Elaboration of the format and processing of the survey by Hans Lousbergh and Willem

Bongaarts from the ICISA Secretariat..

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4. Main findings

Bond business is not as standardized as the credit insurance business Surety business is

very dependent on the legislation, the market practice and the rules in the respective country

Consequently the picture of the distribution between On Demand Guarantees and

Conditional Bonds is quite different per country (Q 2 + Q 3).

In some countries a certain bond wording, i.e. On Demand or Conditional is obligatory

respectively regulated by law or is general market practice:

“Surety companies in Canada are prohibited from underwriting on demand guarantees”.

“For certain (public) beneficiaries the use of the specific standard wordings is obligatory in my market Australia, Italy, Japan, New Zealand, Singapore and Spain.”

“The policy wording must be tailored to the regulatory requirements in my bond market Australia, Italy, Japan, New Zealand and Singapore.”

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>>4. Main findings

It seems that generally in the markets where the bonds for public beneficiaries are On

Demand also the bonds for the private beneficiaries tend to be On Demand (Q 3).

In 8 markets the trend of On Demand Guarantees is increasing whereas in 15 markets it is

stable (however here are included several “On Demand Guarantee” markets).

The underwriting guidelines or reinsurance cover are generally more restrictive in the case of

On Demand Guarantees (Q 1 and 5).

This might also be partly the reason why 34,8% of the participants responded that the claims

ratio is not higher for On Demand Guarantees.

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>>4. Main findings

General picture More lobbying by ICISA needed for the surety bond product in general.

Some of the related comments of the respondents to the questionnaire:

“Everything which improves knowledge regarding surety is of help, final clients often do not understand differences between surety and bank guarantee.”

“Any initiative to raise the profile of the Surety Industry is positive.”

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>>4. Main findings

Of the respondents 78% were of the opinion that the use of an international wording might

serve as a promoter of bond business.

The majority of the respondents (60,9%) are of the opinion that advocacy for the promotion

of the ICC URCB principally makes sense.

The same percentage (60,9%) was of the opinion that ICISA should even lobby for the use

of the URCB in the case of international institutions (although these generally insist on the

use of an on demand wording and efforts in the past were unsuccessful).

From the 13% that answered the previous question with no, only 3 responded to the Q13:

“should ICISA - since international institutions generally insist on a on demand’ wording - instead concentrate its efforts on the lobbying of the more “principal friendly” ICC On Demand Wording?”

2 respondents indicated yes, 1 no. Comments of the respondents to this question:

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>>4. Main findings

“The lobbying is already being carried out by the banks.”

“On demand wordings place the principal under a risk of unfair calling and therefore a like for like counter indemnity call. Any lobbying for better wording would be beneficial for both surety and principal alike.”

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>>4. Main findings

One of the comments to Q 12 suggested to increase the bond percentage:

“The World Bank often sponsors large projects that are prone to significant cost overruns.

Only writing "blank cheques" (on demand guarantees) or inserting all sorts of liquidated

damages fails to ensure that the projects are delivered on time and on budget. Conditional

bonds with higher penal sums than bank guarantees could address these cost overruns

more effectively.”

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5. Discussion on further steps

Development of a common understanding of the terms On Demand Guarantees / Conditional

Bonds within the Surety Committee / ICISA?

Collection of the different special types of bonds that are “miscellaneous” forms as for

example the On Demand Conditional Bonds in Germany or Spain (presentations by the

members? See presentation of Jorge Orozco on the new product type in Mexico)?

Lobbying for an international wording by ICISA although on the one hand there are a variety

of markets with specific standard wordings and on the other hand there are a great variety of

beneficiaries?

Developing an own international wording within ICISA?

Lobbying by promoting the URCB?

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>>5. Discussion on further steps

In the case of promoting the URCB have these to be updated (Setting up of a working group?

Together with PASA?)?

Approval of / cooperation with ICC. Together with PASA (wait first for the finding of the survey

of PASA?!)?

Lobbying for the use of the URDG in the cases Demand Guarantees are obligatory /

requested so as to ascertain that the beneficiary has to fulfill at least some minimum

requirements for demand (as deterrent to unfair calling)?

Differentiation of the surety product (->conditional bonds) from the bank product ( On

Demand Guarantees) through increase of the bond percentages (discussion on the pro´s and

con´s in a working group?)?

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>>5. Discussion on further steps

In whatever form, bonds / guarantees issued by sureties need lobbying there seem to be

quite a number of players that do not know our product(s) / ignore it in their regulation

(Example EMIR regulation / First step taken -> Working group on advocacy)

Who should be the targets of the lobbying of ICISA? Supranational institutions with

development character like the world bank; governmental institutions who are in charge of

public offerings; the associations of the building industry etc.?

Do you agree to forward the outcome of the survey to PASA?

Other suggestions regarding further steps?

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THANK YOU VERY MUCH

FOR YOUR ATTENTION

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