What is Surety Insurance?


Gamco Team

You are probably wondering: What is surety insurance and how does it help your company? In the current economic environment, many companies choose to take out surety insurance to guarantee that, in the event of not being able to meet a financial obligation, a debt can be settled. But is it worth taking out surety insurance? 

The main problem facing companies is non-payment. In a context of global economic crisis, a overpayment can lead to bankruptcy. For this reason, companies have to demand requirements from their customers to guarantee payment for their services.

What is Surety Insurance and how does it work?

Companies and individuals do business in very complex environments, i.e. in environments that are constantly changing. This creates a high level of risk that a contract will not be fulfilled.

A surety insurance acts as a guarantee, ensuring the fulfillment of the legal obligations contracted. In other words, the insurance company indemnify to the insured in cases where the policyholder fails to comply with its legal obligations, guaranteeing payment of the debt contracted. Therefore, it can be presented to third parties that demand this requirement, such as Public Administrations.

What coverages does Surety Insurance have?

Surety insurance, also called warranty insurancesare regulated according to article 68 of the Insurance Contract Law. On a practical level, it can be used with different purposes. The main application of surety insurance is the performance warranty of the services, by which it is guaranteed that the policyholder will fulfill its contractual obligations. 

However, there are other uses, such as the submission securitywhich will support the seriousness of the offer in cases of tenders and auctions or the quality assuranceThe beneficiary will be indemnified, for an agreed period of time, for manufacturing defects that have occurred and that do not meet the quality standards that have been determined.

Depending on the professional field in which the company operates, there are different types of surety insurance. Although in some cases it is obligatory by law, it is usually recommended always in those relationships in which an additional guarantee is required. Such is the case, as already mentioned, of relations with Public Administrations.

The security companies They must also take out surety insurance to cover any possible security breaches they may commit. The energy sectorthe temporary employment agencies and companies agri-food are also required to have this type of insurance.

Surety insurance VS bank guarantee?

Bank guarantees and surety insurance are basically the same thing: a mechanism by which someone will vouch for a company in order to meet a debt.

However, today, obtaining a bank guarantee is a very difficult task. complex and it is full of conditions. To begin with, it is bureaucratically much more tedious and involves the payment of commissions The bank must also pay opening fees, risk studies and notary fees, among others. On the other hand, in order to get a bank to guarantee a company or an individual, it is necessary to pledge The guarantee must be either in the form of an asset, generally real estate, or in the form of a deposit of an amount to constitute this guarantee. This involves an important freezing of funds which is not required in the case of surety insurance.

In addition, surety insurance is not included in the CIRBE (Central Risk Information Center of the Bank of Spain). creditworthiness of the company remains unchanged.

Regarding price, a surety insurance is considerably cheaper than a bank guarantee. Its payment accrues annually, like any other insurance policy. However, determining the amount of surety insurance is not a simple matter, since it depends on the coverage and the total amount to be paid.

Alternatives to surety insurance thanks to Artificial Intelligence

It is important not to confuse surety insurance with credit insurance. Credit insurance is the insurance that a company takes out in order to protect against non-payment of its customers.

Credit insurance is a fixed cost in the accounts of any company that wants to protect its financial situation. However, new technologies can be used to save a good sum at the end of each financial year and there is an "alternative to surety insurance" thanks to Artificial Intelligence.

An example of this is ARM-SaaSThe company's customer portfolio is analyzed and its behavior studied by means of Artificial Intelligence. Thus, it is possible to determine the risks of non-payment y anticipateThe company was thus brought into a compromising situation.

Default prediction: the most economical alternative

The default prediction based on Artificial Intelligence applied by ARM-SaaS presents two modalities, basic and advanced, which are adapted to the needs and size of the customer. Its price is also adjusted according to the particular characteristics of each modality.

Through a data analysis, ARM-SaaS establishes a series of alerts of early default and proposes actions to take to mitigate or, directly, to avoid an economic loss. It even calculates the cost that the risk of non-payment of each particular customer will produce in the company. In this way, it speeds up the decision making process and accelerate processesFrom the very beginning, ARM-SaaS will be the perfect partner so that SMEs and the self-employed can protect the economy of their business, not worrying about such a crucial aspect as delinquency and managing to establish a portfolio of solvent clients.

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