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Crystal Ignatowski By Crystal Ignatowski • August 27, 2018

Financial Guarantee Bonds And Ice Cream – What They Have In Common

financial guarantee bond

 

What Do Financial Guarantee Bonds Have To Do With Ice Cream?

Flavors. The common theme is flavors. 

Just as the number, scope, and use of ice cream flavors has dramatically broadened over time, the number, scope, and use of surety bonds and financial guarantees has also broadened.

 

What Is A Financial Guarantee Bond? 

The term financial guarantee bond is an umbrella term that means "the guarantee of payment or payments on a financial obligation." Or at least this is what the term meant in the 1970's – just like there was only vanilla ice cream at one point in time.

Since the 1970's, the term financial guarantee bond  has taken on new meaning due to a demand for bonds that arose during investment transactions.

Today, the term can mean many things. The term financial guarantee bond is often interchanged with terms like financial guarantee insurance, credit enhancement insurance, and more. 

When people say they are looking for a financial guarantee bond, they might mean a general license and permit surety bond, or they might mean an intricate mortgage obligation. Read on to find out more.

 

Types of Financial Guarantee Bonds

While there are many types of financial guarantees,  for our conversation we'll break them into three main types of financial guarantee bonds, or three main types of ice cream flavors. They are as follows:

 

1. Small or finite financial guarantee bonds 

Also known as commercial financial guarantee bonds. Surety bonds come in all kinds of flavors. Financial guarantee bonds are one type of flavor. Some financial guarantee bonds are seen as license and permit surety bonds (i.e., Alcohol Tax Bonds, Contractor License Bonds, Farm Labor Contractor Bonds, etc) that guarantee both the performance or fulfillment of an obligation and the faithful payment of a financial obligation. Other small or finite financial guarantee bonds solely promise the payment of prescribed terms (i.e. Utility Payment Bonds, Lease Bonds, Wage & Welfare Bonds).

The amount of money being guaranteed (generally the size of the bond) as well as industry’s experience with claims (are there a lot of claims, no claims, always claims) determine the application, underwriting, and approval process.

These types of bonds number in the tens of thousands and are written all the time. We, Surety Solutions, can issue these bonds.


2. Structured financial guarantee bonds

Also known as structured financial products. These products usually involve one or several transactions to be completed. They are often used when a simple loan or other type of conventional financial instrument will not satisfy. Examples include Collateralized Mortgage Obligations (CMOs), Credit Default Swaps (CDSs), and hybrid securities. 

Depending on the type of financial product, these are only sold through financial advisers. Surety Solutions does not offer this type of service (nor do most other insurance agencies).


3. Public financial guarantee bonds

Also known as municipal bonds. These bonds are issued by a local government agency or territory and used to finance public projects. 

Think of a school bond where a local school district needs to raise funds for new schools or repairs. The local voters have to approve the bond which then provides a portion of the funds needed for the overall project. The school district (or municipality) then begins to sell the municipal bonds on the open market.  Since the school district pays back the initial investment with interest, the bond purchasers (investors) have a chance to earn a profit when the district pays them back.

This is another type of financial guarantee bond that is NOT sold by your local insurance agency. 

 

Differences in the Types of Financial Guarantee Bonds

One main difference between the three above types of bonds is the bond penalty. The bond penalty (or bond amount) is the monetary amount the Surety is liable for. Small or finite financial guarantee bonds often have a small penalty, while the bond penalty in the other two categories is usually very high.

In fact, due to the high penalties of the latter two types, New York State passed the Appleton Rule which restricts financial guarantee business to specialty, licensed monoline carriers that have specific surplus and reserve levels. Basically, monoline carriers are permitted to write essentially only one line of business; in this case, financial guarantee bonds.

The Appleton Rule also requires that every insurance company doing business in New York is to abide by its state law, even when doing business in other states. Thus, while a New York rule, it now applies to every state where an insurance company operates.   You can learn more about financial guarantee bonds and the Appleton Rule here.

Later, the Financial Guarantee Insurance Model Act was created to recognize financial guarantee insurance as a separate and unique kind of insurance that should be treated as such.

In short, this means that not everyone can offer financial guarantee bonds, and certain financial guarantee bonds (aka different ice cream flavors) are much more difficult to obtain.

 

Getting a Financial Guarantee Bond

The type of financial guarantee bond (aka the flavor of ice cream) you need will determine  the ease and/or difficulty of obtaining one.

 

 

Small or Finite Financial Guarantee Bonds

If you are needing a small or finite guarantee bond, one that is generally seen as a license and permit surety bond, then you can apply for one of these through a licensed surety bond company

We, Surety Solutions, can write these bonds. 

These bonds are seen as hazardous, though, and are very carefully underwritten. To be approved, you should have strong financials and strong credit.

These types of surety bonds include:

  • Sales Tax Bonds 
  • Farm Labor Contractor Bonds 
  • Airline Reporting Corporation (ARC) Bonds
  • Freight Broker Bonds
  • International Fuel Tax Association (IFTA) Bonds
  • Lottery Bonds
  • Medicare/Medicaid Bonds
  • Utility Bonds
  • Wage and Welfare Bonds

To apply for one of the above financial guarantee bonds with Surety Solutions, get started with a free quote below:

Get a Financial Guarantee Bond Quote

 

Financial Guarantee Bonds to Support a Loan

If you are needing a financial guarantee bond to say, support a loan that you are looking to get, this would be a different type of financial guarantee bond (one of the latter two options listed in the “What is a Financial Guarantee Bond” section).

Due to the Appleton Rule and the Financial Guarantee Insurance Model Act listed above, these financial guarantee bonds are not usually available from standard markets. Most entities are unwilling to write bonds for private contracts. Some will only issue financial guarantee bonds to municipalities that collateralize the obligation with bonds or other instruments issued by that municipality. (Source)

We, Surety Solutions, cannot write these bonds.

If you are looking for a financial guarantee bond of this type, you could try approaching a specialty insurance or captive insurance agency that is not affected by the monoline carrier restriction as mentioned in the Appleton Rule.

You could also try reaching out to specific companies that are known for handling this market. Some resources list the following companies as such:


Other resources
list additional firms:


We are not affiliated with these companies, nor can we speak to their ability to handle your product needs.

In the case that you can find a company to issue you a financial guarantee bond for a loan, full collateral will likely be required.

 

 

Related links:

Challenges Related to Financial Guarantee Insurance

About Monoline Insurers

About the Appleton Rule