Voluntary advance payment insurance

Insurance of the advance payment under a tender for construction and installation works. Advance payment insurance, financial risk insurance

This is exactly what insurance of advance payments for construction and installation works is called, or the group it belongs to. This type of insurance should not be confused with construction and installation risk insurance or with a construction and installation works insurance contract. Insurance of advances for construction works is a separate type of insurance and belongs to financial risk insurance. Kazakhstan is engaged in large-scale residential, industrial and infrastructure construction, and the state budget seeks to protect itself against unreliable partners and poor-quality work; one way of addressing this is insurance of the advance payment made under a tender for construction and installation works. Advance payment insurance is a relatively new guarantee instrument that has come to replace the bank guarantee, since a bank guarantee is considerably more expensive and harder to obtain. Advance payment insurance has been covered briefly in some articles on www.asab.kz, but here we will look at this type in detail. There is no question as to which groups are most interested in this type of insurance: undoubtedly, construction companies taking part in public tenders and in tenders held by state-owned companies such as Samruk-Kazyna and Baiterek.

Why advance payment insurance is needed

Construction companies bidding for or having won a tender must guarantee to the customer that the funds will be used for their intended purpose, but how can they do so if their capitalisation equals 10% of the tender value, and in most cases they do not even have that? For this purpose the customer develops and adopts measures to secure the financing. One of these instruments is advance payment insurance.

In procedural terms, it works like this: after a successful tender, the contractor takes out an advance payment insurance contract that sets out guarantees that the works declared in the tender will be performed.

The advance payment insurance contract

The main condition of the contract is that the insurance company guarantees the return of the advance amount if the contractor fails to perform the works under the construction contract due to bankruptcy (other reasons may also be specified). The stages of concluding a voluntary advance insurance contract are the same as for other voluntary classes of insurance, but, as everywhere, there are some subtleties:

• To obtain the best rate, you need to show the customer's financial statements;
• Be sure to provide for insured events and causes that may realistically occur;
• At the same time, show the insurer additional guarantees and your intention to fulfil the order in full.

How much an advance payment insurance contract costs

The cost of the contract depends on many factors, but the insurance rate typically starts at 2.1% of the sum insured. The sum insured under an advance insurance contract is the amount of the advance, usually 30% of the total tender amount.

The insurance rate is influenced by the following factors:

1. The contractor's track record, specifically a positive track record, in this field;
2. The contractor's availability of funds to perform the specified works;
3. The complexity and timeframe of the works.

The advance insurance contract and its price also depend on proper organisation of the placement of this risk, so if you are interested in this type of insurance, contact the insurance brokers and agents listed in the association's register.