Individuals and businesses enter into all sorts of contractual obligations with third parties such as:
Typically, the first party will seek from a second party some form of surety that is foregone if the agreement isn’t fulfilled. Typically, the surety is in the form of cash or a bank guarantee.
This results in cash reserves or working capital being tied up and not allowed to work more effectively for the second party.
‘Insurance bonds’ replace the need for cash or bank guarantees and are issued by insurers who are leading, credit rated Australian or global brands. As with other financial institutions, these insurers are governed by APRA and licensed. There’s no reason to differentiate between the credit worthiness of bank issued, bank guarantees or insurer issued, insurance bonds.
Whilst it’s ultimately at the beneficiary’s discretion to accept an Insurance Bond, we find most initial objections it’s more a matter of awareness, than concerns above a bank versus an insurer backed surety document. Having said that, it seems rather shortsighted that a beneficiary will happily place $5M, $10M, $25M Property Insurance (‘short tail risk exposure’) or indeed, $5M, $10M, $25M Public Liability Insurance (‘long tail risk exposure’) with an Australian Prudential Regulatory Authority (APRA) approved and licensed Australian insurer, yet, question the security of the same insurers over a $50K, $100K or $250K+ insurance bond. APRA is the same government authority that also approves and licenses Australian financial institutions. Insurers and financiers are similarly regulated.
The documentation required to apply for most insurance bonds is similar to that required for a bank guarantee, however, the turnaround process is much faster; the same or less costs than bank fees*; in the case of an insurance bond, once the insurance bond is issued, it’s issued for the duration of the contract or agreement i.e., if it’s a 5 year commercial tenancy/lease contract, the insurance bond is issued for the 5 year period and the file not revisited until the applicant wants to renew the tenancy/lease contract in 5 years time. (* Whilst the fees may be similar, it’s the opportunity cost of having access to the freed up capital that really counts!)
Whilst freeing up cash or working capital is a common benefit across most insurance bonds, different types of insurance bond deliver additional unique benefits.
We suggest that you familiarise yourself with the various types of insurance bonds. If you wish to apply, please complete the Enquiry Form and submit to us. A team member will be in contact within 1 business day to further advise on your needs.