Page 317 - M97TB9_2018-19_[low-res]_F2F_Neat2

Chapter 11 Casualty reinsurance 11/27

It is possible that all of these calls for security can be met by cash deposits but this carries several
difficulties, including problems in recovering the money subsequently. Contractors often use on-demand
bank guarantees, but these are treated as overdrafts and immediately use up facilities and give no
protection against ‘unfair calling’, where the principal takes advantage of the on-demand character to
claim the money even if the contractor has fully performed under the contract. It is possible to insure
unfair calling in the political risk market at Lloyd’s or with company underwriters, where the principal is a
government or a quasi-government body, such as a power undertaking.
As an alternative to the above, the contractor can obtain an insurance company surety, which is written
Surety bonds are not
to pay the principal if contractual or pre-contractual obligations are not met. Surety bonds are not contracts of insurance
contracts of insurance. They are made available on recourse terms so that, if the surety has to pay the
principal, it is entitled to seek reimbursement from the principal contractor. Unlike indemnity insurance,
where the premiums effectively pay for any losses, surety bond premiums are ‘credit and service fees’
charged for the use of the surety company’s financial backing and guarantee.

Example 11.11
An architect submits a tender to plan and design contract works. Its bid is accepted by the principal. A ‘bid’ bond
assures that if the architect then does not agree to the job as bid, the principal who requested the bid receives
compensation, as time and expense is incurred in having to seek further tenders all over again.

Sureties can be used for other purposes. A customs or duty deferment bond allows removal of goods
Sureties can be used
from a bonded warehouse before duty has been paid to the customs authorities. The structure of the for other purposes
relationships is similar to the above.

J2A Underwriting considerations
Reinsurers will be concerned to know that the insurer does not take risk on for applicants with low,
non-investment grade, credit ratings and will specify acceptable risk categories. Concentration risks on
related companies or on the same contract, where sureties are being issued for several subcontractors,
will be defined and limited.
Accepting that the contracts and the sureties will be subject to laws of countries other than the insurer’s Reference copy for CII Face to Face Training
or contractor’s country, the reinsurer will be careful to avoid unexpected or unlimited claims arising from
such local law. The terms of the reinsurance treaty must define and limit the scope of the wording of the
surety and the counter-indemnity.

The process by which the insurer selects applicants and the size and types of contract will also be
relevant points in terms and rating. Rating is likely to be based on the quality of the insurance company
and its experience.

J3 Political risks

When considering political risks as a peril the following issues are problematic.
Firstly, a common definition of political risks in entirety does not exist. Therefore, the peril ‘political
A common definition
risks’ is described by an enumeration of terms, e.g. war, invasion, rebellion, revolution etc., which are of political risks in
themselves subcategories of various political risks. However, there are also no common definitions for entirety does not exist
these subsections of political risks (e.g. what exactly is a rebellion?). Further, there are no definitions of
the scale of the various subsections of political risks and furthermore the transition between the various
subsections of political risks may be floating (e.g. at what stage would a civil unrest become a civil
commotion, an insurrection or even a civil war?).
Secondly, there is generally no common agreement which institution/authority declares a status of
political risks (except for terrorism in some countries).
Thirdly, used terminologies can have different meanings depending on applying jurisdictions (e.g.
dispossession). It therefore has to be clarified, for each market/jurisdiction separately, whether/how the
terms usually used to describe political risks are legally defined. Chapter

11