International commercial surety bonds pose complex situations for producers

By Kathy Hoffman posted 04-21-2015 07:57 PM


Interest in international commercial surety bonds has risen in several regions of the world, creating opportunities and challenges for producers, said Kathleen Mitchell, National Practice Leader for Surety at Wells Fargo Insurance Services USA, Inc. She served as moderator of a Tuesday, April 21 session on the topic at the NASBP 2015 Annual Meeting & Expo, in San Diego.

Mitchell said that, when the global economy began undergoing significant changes in 2008, U.S.-based clients doing business internationally were looking into options other than the letter of credit, which is commonly used in other countries. Initially, she noticed more inquiries involving countries in the U.K. Producers also have seen demand in Mexico and are noticing more interest in Canada, Australia and South American countries including Brazil, and Colombia, Mitchell said.

The level of inquiries has risen as the global economy has expanded in the past two years, and part of the reason is because of changes in governmental requirements to allow surety bonds rather than just letters of credit as security, something that has been occurring in Canada, she said.

It's also a “function of the banking environment in certain regions of the world, as well, as banking capacity has decreased,” leading to requests for alternatives such as surety bonds, she said.

Surety bond producers dealing with an international commercial bond request need to be aware of how bonding is treated in other countries, because they must ensure they have the proper licensing and be able to communicate with clients about the pertinent laws and regulations, Mitchell said.

Such bonds are typically placed in two ways, she said: directly, in the case of a surety company with offices around the world, or through fronting relationships with a carrier domiciled in the country of interest or bonding agency in that country. Fees and licensing can become important factors in fronting, so agencies must bear in mind that the customer could face additional costs beyond the premium once the bond is placed.

Confusion can result from the varying definitions of the term “surety” outside the U.S., because some countries may define a surety bond as “more of a bank guarantee” or something more similar to a letter of credit, she said. In fact, in some markets around the world, surety bonds are issued by banks instead of being supplied by insurance carriers.

“How we think of surety in the United States is not necessarily how the rest of the world thinks about it,” she said.

The issue of international commercial surety bonds is an emerging one, and carriers are still trying to develop resources to help producers serving that market. Producers currently tend to rely heavily on surety carriers with foreign offices to provide information about the regulatory environment in other countries, Mitchell said.