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).  If an insurance company were to involve a bank, 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 Uniform Rules for Demand Guarantees, ICC Pub. No 758.  more on URDG 758
   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 capital 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.
2. 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 CGP is the source of capital, with a Loan Agreement that defines the 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, not a bank, to uphold the agreement.  Less complicated, 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 8.5% APR without a guarantee versus 3% fixed APR for as long as needed with a guarantee that is allowed to expire immediately after the project begins commercial operations).
3. 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.  This is one of the main ways our use of a financial guarantee differs from a traditional loan guarantee (more).

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