News

Insurers are your best bet when it comes to construction guarantees

31 January, 2012

In the building industry, banks have traditionally provided construction guarantees. Despite insurers like Etana launching competitive products in the marketplace, the majority of construction companies are still being referred to their banks.

“Brokers have been unaware that insurance companies offer guarantee facilities,” says Clive Sparks, Etana’s underwriting manager of guarantees. “And in some cases, they don’t understand the guarantee product.”

Currently, a perceived negative for insurers is that when a contractor obtains a guarantee from the bank, the premium is less than it would be if issued by an insurer. However, this is only because guarantees are not a core focus of banks and therefore they insist on the contractor putting up 100% collateral security. This means that the contractor has to tie up valuable working capital which could be better used for supplies and start-up costs.

Clive explains that while guarantee facilities underwritten by insurance companies will be subject to a higher premium, there is a major benefit in that the collateral requirements may be reduced by as much as 80%.

“The time has come for brokers to talk to their clients and present the benefits of placing their performance, advance payment and retention guarantees with an insurer like Etana,” says Clive. “Traditional routes are no longer the only option; we know how to ensure that clients are adequately covered.”

As an example, a contractor is awarded a contract worth R20 million. The contractor is obligated to provide a Performance Guarantee of 10% of the total contract value. This amounts to R2 million in favour of the employer.

Here is a direct comparison in an event where the contractor sources a performance guarantee from a bank versus an insurance company:

Insurance company	Bank
•  Collateral required between 10 and 20%	•  Collateral required 100%
•  Collateral value between R200 000 and R400 000	•  Collateral value is R2 million
•  Premium rate between 2% and 2.5%, including	•  Premium rate between 1.5% and 2%, including
conditional guarantee wording	unconditional guarantee wording

This evaluation shows that with an insurance guarantee, although the premium is higher, the collateral requirement is far less and therefore frees up valuable working capital.