Guarantee: A legal tool for risk management

Guarantees and insurance policies are both common and effective legal tools designed for risk management. With their increasing flexibility, they play a significant and influential role in both domestic and international trade. Despite some similarities, there are notable differences between insurance policies and various types of guarantees. 

Additionally, the lack of legal clarity governing the issuance of insurance guarantees makes it challenging for insurance companies in less developed countries to engage in this activity, necessitating general and specialized legal feasibility studies.

Today, to meet the diverse needs of commercial actors and provide coverage for ensuring the fulfillment of contractual obligations by traders, contractors, and consultants, it is essential to study and review prior practices and similar performances of relevant entities in other countries, as well as the established international regulations related to the subject. This approach enables the adoption of necessary measures and the development of localized and regional solutions.

In some developed countries, such as the United States, where insurance companies, like banks, have acceptable financial credibility, most guarantees are issued by insurance companies and surety companies. However, issuing guarantees by these entities is only feasible under the governance and enforcement of appropriate regulations.

By closely examining the initial stages of drafting regulations on guarantees by the International Chamber of Commerce (ICC), it becomes clear that the ICC’s Insurance Commission took the lead in standardizing and establishing uniform practices for a specific type of insurance company performance related to the issuance of contractual guarantees.

Thus, the first guarantees issued by insurance companies were contractual guarantees. However, it should not be assumed that insurance companies are limited to these regulations for issuing guarantees or that they can only issue contractual guarantees in accordance with said regulations. 

On the contrary, it can be confidently stated that today, insurance companies are capable of issuing not only various types of contractual guarantees but also independent guarantees.It is evident that the issuer of an independent guarantee can adopt the Uniform Rules for Demand Guarantees as the primary basis for issuing such guarantees, regardless of whether the issuer is a bank, a reputable financial and credit institution, an insurance company, a surety company, or a specialized guarantee institution.

Insurance companies, by their nature, do not inherently possess the necessary conditions and standards for issuing guarantees. They must undergo structural changes in their operations to issue guarantees and acquire certain qualifications, such as obtaining the necessary permits from relevant authorities, maintaining strong financial capacity, and revising their processes for reviewing customer requests and their methods for determining payments.