Guarantees vs. Insurance

Although they both provide levels of security or surety to contracting parties in the event of non-fulfilment, there are three key differences between a financial guarantee and any insurance product:

1. No insurance product constitutes a bank-related guarantee by virtue of the issuer — an insurance company versus banks (in the case of a Bank Guarantee / Standby Letter of Credit), or a private party issuing a commercial Promissory Note with a bank’s Aval (stamp of endorsement), an AvPN.
   Note that if an insurance company were to involve a bank, with similar verbiage to our template, then it would become a “financial” instrument, subject to banking rules, not merely the insurance company’s policy contractual terms. This matters because our funding hinges on our partner’s funding banks’ ability to deliver private capital, per the rules imposed on them by the international banking system, such as the governing Uniform Rules for Demand Guarantees, ICC Pub. No 758.  more on URDG 758
   Other legal venues (UCP 600 or ISP98 / ICC 590) can also be used, but we find URDG balances the interests of both parties better than the alternatives. 
2. That said, insurance can still be a wise purchase for other reasons. Our flagship capital partners accept either of these aforementioned instruments to fund projects at an early stage, beginning with any remaining pre-construction steps, then during construction as credit enhancement and to ensure completion and commissioning of the project.  Such financial guarantees are strictly focused on performance, or to be precise, a remedy for non-performance within established contracts (in this case, with a Loan Agreement that requires the developer to resolve issues and complete the project), whereas insurance products underwrite contracts to protect against possible loss in other areas.  The only exception is when a contractor offers a completion bond (type of insurance product), which overlaps in its purpose, but protects the developer in case of loss.  Here, our use of a “Completion Assurance” guarantee protects us, as the provider of capital, effectively filtering out fraud/malfeasance (we cannot call the guarantee arbitrarily) no matter what party brings the bank-involved guarantee on the developer’s behalf.
3. Guarantees are underpinned by an indirect agreement between the guarantor(s), the issuing bank guaranteeing the completion of a project, and a beneficiary, which with CAP deliver the capital under a Loan Agreement that defines the funder’s and borrower’s obligations (“performance”).  By contrast, insurance is a direct agreement between the insurance provider and the policy holder regarding the policy holder’s activities.  There is usually just an insurance company, or reinsurance, not a bank, to uphold the agreement.  Less complicated, perhaps, but also not much depth or value to those seeking to raise funding at the best available terms.  
   Note that we can also finance highly profitable projects at a much higher cost of capital (e.g., at or above 11-13% APR for a construction loan, without a guarantee, versus CAP’s 5-7% APR — SONIA + 2.5%) for as long as needed with a guarantee that is allowed to expire immediately after the project is commissioned to begin commercial operation). Construction loans are a separate party, and pathway, with much less forgiving due diligence. 
4. Finally, whereas insurance can usually be cancelled by either the provider or the policy holder if enough notice is provided — a “pay as you go” product — financial guarantees cannot be cancelled.  Once they are operative and in use, they are considered “irrevocable.” They automatically expire once the contract they apply to is fulfilled, which in our case is when the project construction and commission are completed, market as the Commercial Operation Date (COD).  This is one of the main ways our use of a financial guarantee differs from a traditional loan guarantee (more).

For more on how to communicate the above, and more, with bankers: Communicating with Bankers for their part in a CAP Financial Guarantee

For commercial, political or credit insurance coverage, available through In3 and our partners, visit this overview or contact us.