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Commercial insurance coverages and surety bonds come in a dizzying array of forms, but what many people might not realize is how complementary these products can be in managing risk.

A commercial surety bond mitigates risk, but technically it’s not insurance. A bond is a contractual guarantee among three parties: the surety, or entity guaranteeing that performance, financial or compliance obligations are met; the principal, which buys the bond; and the obligee, which receives the value of the bond if the principal defaults on its obligations. An insurance policy is a risk-transfer contract that only involves two parties: the insurance company and the policyholder.

Excess casualty insurance is a valuable form of protection for organizations with significant liability exposures. Certain types of insurance programs – such as a large-deductible general liability or auto liability policy where excess coverage sits atop the underlying coverage – may require policyholders to post collateral. To meet collateral requirements, a policyholder typically posts funds held in escrow or relies on access to a bank-issued letter of credit (LOC). However, increasingly policyholders are realizing the value and efficiency of surety bonds for this purpose.

Commercial bonds offer several advantages over bank-issued LOCs, including:

  • Competitive pricing. Insurance companies offering bonds have lower capital requirements than banks, which allows for more competitive pricing of bonds than LOCs. Credit markets also can be volatile, leading to higher costs or scarcity of LOCs.
  • Conditionality. Bonds require proof of default, whereas beneficiaries of LOCs can draw down on them for any reason. Bonds’ conditionality restricts payment to cases of actual default. They are still a very liquid instrument, while protecting the principal, our customer.
  • Assurance. Bonds offer different ways to cure a default, from financing the principal so it can complete its work or obligation, to bringing in a new principal to finish the work. LOCs only pay the beneficiary.
  • Flexible term length. Bonds are commonly issued for one year, but they can be written for the term of the underlying obligation. LOCs generally are renewable annually.
  • Freeing up capital. Replacing LOCs as collateral can unlock capital and let the principal use its available credit to finance growth or other initiatives.

This combination can deliver financial protection and flexibility to support an organization’s growth and profitability

Reducing the cost of risk
Here’s a hypothetical example of how combining excess casualty insurance with a commercial bond can reduce an organization’s cost of risk:

A large manufacturer, Made-Right Corporation, self-insures much of its general liability risks using a high self-insured retention policy. The retention serves as the program’s working layer, where the majority of Made-Right’s general liability claims occur. The excess insurance attaching above the self-insured retention provides protection for very large claims. State regulations require the corporation to post collateral to ensure claims within its deductible are paid.

Made-Right reduces its cost of risk by self-insuring high-frequency, low-severity general liability claims, such as minor injuries from slips and falls by passersby outside the manufacturing plant, while buying excess insurance for high-severity claims. Instead of posting a letter of credit to satisfy state requirements, the corporation buys an insurance program bond equal to the size of the estimated annual exposure within the self-insured retention. With liquidity and expense savings from the bond, Made-Right invests in loss control and safety initiatives, to further reduce its general liability cost of risk.

This is just one example of how bonds and casualty insurance programs can work together. There are many other scenarios where the combination can deliver financial protection and flexibility to support an organization’s growth and profitability, across numerous industries, from manufacturing to aerospace, energy, financial institutions, retail and professional services.

For more information on commercial bonds and excess casualty solutions, please visit

About the Authors
Maria Duhart is the Global Head of Commercial Bonds in AXA XL’s Political Risk, Credit & Bond division. She has more than 20 years of experience in insurance, business strategy and finance. Before joining XL Catlin in 2017, Duhart held various leadership roles in commercial surety. She studied economics at the Catholic University of Argentina, completed a certificate in administration and management at Harvard University and holds a Master of Business Administration degree in strategy and finance from New York University’s Stern School of Business. She is a Chartered Financial Analyst.

Donnacha Smyth is President of Excess Casualty, Americas for AXA XL, a division of AXA. He joined XL Catlin in 2007, where he was chief excess casualty officer until 2016, when he took on another international excess casualty leadership role at a global insurer. He returned to AXA XL in 2018 and oversees global teams in the Americas.

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Global Asset Protection Services, LLC, and its affiliates (“AXA XL Risk Consulting”) provides risk assessment reports and other loss prevention services, as requested. This document shall not be construed as indicating the existence or availability under any policy of coverage for any particular type of loss or damage. AXA XL Risk. We specifically disclaim any warranty or representation that compliance with any advice or recommendation in any publication will make a facility or operation safe or healthful, or put it in compliance with any standard, code, law, rule or regulation. Save where expressly agreed in writing, AXA XL Risk Consulting and its related and affiliated companies disclaim all liability for loss or damage suffered by any party arising out of or in connection with this publication, including indirect or consequential loss or damage, howsoever arising. Any party who chooses to rely in any way on the contents of this document does so at their own risk.

US- and Canada-Issued Insurance Policies

In the US, the AXA XL insurance companies are: AXA Insurance Company, Catlin Insurance Company, Inc., Greenwich Insurance Company, Indian Harbor Insurance Company, XL Insurance America, Inc., XL Specialty Insurance Company and T.H.E. Insurance Company. In Canada, coverages are underwritten by XL Specialty Insurance Company - Canadian Branch and AXA Insurance Company - Canadian branch. Coverages may also be underwritten by Lloyd’s Syndicate #2003. Coverages underwritten by Lloyd’s Syndicate #2003 are placed on behalf of the member of Syndicate #2003 by Catlin Canada Inc. Lloyd’s ratings are independent of AXA XL.
US domiciled insurance policies can be written by the following AXA XL surplus lines insurers: XL Catlin Insurance Company UK Limited, Syndicates managed by Catlin Underwriting Agencies Limited and Indian Harbor Insurance Company. Enquires from US residents should be directed to a local insurance agent or broker permitted to write business in the relevant state.