Credit and Financial Guarantee

Credit and Financial Guarantee insurance is defined as contracts of insurance (which includes any indemnity, guarantee, bond, contract of surety or other similar instrument, and references to “insurance” include reinsurance) where the insurer agrees to indemnify the insured against loss, or pay or otherwise benefit the insured in the event of any of the following:

1.   the financial failure, default, insolvency, bankruptcy, liquidation or winding up of any person whether or not a party to the contract of insurance

2.   the financial failure of any venture

3.   the lack of or insufficient receipts, sales or profits of any venture

4.   the lack of or inadequate response or support by sponsors or financial upporters

5.   a change in levels of interest rates

6.   a change of rates of exchange of currency

7.   a change in the value or price of land, buildings, securities or commodities or any other tangible or intangible assets

8.   a change in levels of financial or commodity indices

9.   any liability or obligation under an accommodation bill or similar instrument

Included within Financial Guarantee are the following classes products:

• Single Situation Contract Frustration (Risk Code CF)
• Single Situation Credit Risk (renamed from Trade Credit) (Risk Code CR)
• Whole Turnover Trade Credit (Risk Code WT)
• Significant Risk Transfers and Portfolio Transfers (Risk Code ST)
• Mortgage Indemnity Insurance (Risk Code FM)
• Surety Bond Reinsurance (Risk Code SB)

Guidance on the definitions for the coding of each of the above risk codes and products can be found in Lloyd’s ‘Risk Codes Guidance and Mapping Notes’ on Lloyds.com.

For the purposes of allocating a risk code, where a risk falls within the definition of Financial Guarantee, it should only be assigned to the FG risk code where the risk cannot be properly allocated to one of the other risk codes specified for Financial Guarantee business. For example, Salvage Guarantee and Maritime Liens cannot be assigned to one of the other available risk codes and so risks in these classes would be coded FG.

Where a managing agent is considering a risk but is uncertain as to whether it falls within the definition of Financial Guarantee insurance, the managing agent should discuss it with its Syndicate Performance Manager.

^{Performance Management – Supplemental Requirements and Guidance, page 32}

When considering proposals for the writing of any type of Credit and Financial Guarantee risks Lloyd’s will expect that the managing agent can demonstrate that the following points are addressed:

Appropriate capability and resource

The writing of Credit and Financial Guarantee classes requires a high level of technical expertise in the underlying risks. Where it is proposed that a syndicate will write any of the Credit and Financial Guarantee products then Lloyd’s will expect the managing agent to be able to demonstrate that it has suitable underwriting resources in place. In particular, Lloyd’s will expect managing agents to have a suitably robust analytical resource to support the underwriting of any business. Managing agents should also have appropriate models in place, suitable to the types of risk being underwritten.

Assignment of policy 

All Credit and Financial Guarantee policies (in whichever of the risk codes listed above) must contain a condition that only allows assignment of the policy with the prior written agreement of underwriters. Where assignment of a policy does take place, the obligations placed upon the original insured by the terms of the policy must be transferred so that they become obligations of the assignee.

It is acceptable to allow for the proceeds of a policy to be paid to a third party provided that the obligations on the insured under the terms of the policy remain with the insured.

Insolvency of the Insured 

All policies must contain an exclusion in respect of any loss arising from the insolvency of the insured. In a number of territories or classes it is recognized that market practice may mean that a full exclusion is not achievable (examples of such classes include Japanese contingency, aviation contingency business, and (re)insurance of Export Credit Agencies). In such cases Lloyd’s, on a request received from the managing agent (either as part of the business plan agreement process or for individual risks outside the business plan), may agree with the managing agent the use of clauses that do not provide a full exclusion. Lloyd’s will also agree the scope of business that can be written on this basis.

Delegated underwriting

Other than where delegation is to a service company coverholder, Lloyd’s is unlikely to agree plans for the writing of Credit and Financial Guarantee business in any of the products listed where the risks are bound by way of delegated underwriting. This includes, in particular, binding authorities and line slips.

Accelerated payments

Where policies provide for the insured to be indemnified for the non-payment of a financial obligation by the obligor where the obligation in question involves the obligor making a payment at a future date or a number of payments over time (for example the re-payment of a loan in instalments) then it will be usual for the insurance backing the obligation to pay out over time in accordance with the original payment schedule. Lloyd’s may agree in appropriate cases to the inclusion of provisions for the making of accelerated payments at the sole election of the insured. As a general rule, however, underwriters should, in each case, have the opportunity to agree or decline to make the accelerated payments.

Fraud

Subject to any local legal or regulatory requirements, all policies must contain a clause, or clauses, to the effect that the insurer shall have at least the remedies available under the Insurance Act 2015 in relation to fraudulent misrepresentation and fraudulent claims.

In s8/Schedule 1, the Act sets out that if a qualifying breach of the duty of fair presentation was deliberate or reckless, the insurer (a) may avoid the contract and refuse all claims, and (b) need not return any of the premium paid.

In s12 the Act sets out that if the insured makes a fraudulent claim, the insurer (a) is not liable to pay the claim, (b) the insurer may recover from the insured any sums paid by the insurer to the insured in respect of the claim, and (c) in addition the insurer may by notice to the insured treat the contract as having been terminated with effect from the time of the fraudulent act.

Contracts of surety

Underwriters are reminded that, while underwriters at Lloyd’s can provide reinsurance to non-Lloyd’s firms in respect of business they undertake as licensed surety bond providers (Risk Code SB), Lloyd’s does not permit the direct writing of these contracts of surety. Additionally, licensing restrictions apply to this class in most jurisdictions.

Proposals that are unlikely to be agreed

In view of the nature of the risks involved, managing agents should note that Lloyd’s is unlikely to agree plans that involve the writing of the following types of risks:

• Where the underlying risk is a tradeable instrument or a contract for difference
• Where the primary risk is price risk rather than credit risk, for example:
• Currency fluctuation risk
• Commodity price fluctuation risk
• Any Agricultural revenue protection product (under risk code AG or HA), with the exception of U.S. Multi Peril Crop Insurance reinsurance that is subsidised by the Federal Crop Insurance Corporation
• Financial market fluctuation risk
• Property/land price fluctuation risk

^{Performance Management – Supplemental Requirements and Guidance, pages 33-35}