Federation of Worldwide Chambers of Exporters and Importers

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By: Admin 17-Sep-19 FOWCham

WHAT IS THE DIFFERENCE BETWEEN A GUARANTEE AND INSURANCE IN EXPORT?

Guarantee and Insurance, both terms are related to security but differ entirely. They both represent security to the parties involved in the export-import process but there are two main differences which can be underlined:

  1. Guarantees are agreements which are not made by the buyer and seller directly but involve a third party, for example, an importer of a good will be provided a guarantee by a third party which in multiple cases is the bank which guarantees the importer’s contract. This does not mean that no document of the agreement is created between the buyer and the seller. There are Bond Guarantees which both exporter and importer construct for better understanding of the product requirement and this agreement provided by the third party sits along with the primary agreement. On the other hand, Insurance document is the direct agreement from the insurance provider to the policyholder.
  2. Guarantees are strictly focused on the performance of the seller and the quality of its products whereas in an insurance document there is no role for the importer's performance, it only underlines the need to provide protection in the time of loss of products. Insurance can be canceled anytime by the provider or the policyholder but a guarantee cannot be canceled easily instead they expire once the contract is fulfilled.

 

Advantages of guarantees:

  • Provides assurance to all parties in a commercial transaction that the terms of contracts regarding large financial investments will be met in full.
  • Allow companies to give tendering parties assurances that they can fulfill contracts
  • Offer financial credibility and creditworthiness to the firm through the backing of a bank
  • Enable companies to bid for larger or more lucrative contracts in unfamiliar territories or industries because of the financial assurances underpinning their bids.
  • Are designed and negotiated to have flexibility in their terms, to ensure they can be paid in different currencies.
  • Supports ventures into unfamiliar political or legal jurisdictions where the risk of non-fulfillment of contracts is greater (for example, in a state which rules that an insolvent business in its territory must repay native citizens before it repays private investors).

Advantages of Insurance:

Contrary to the benefits provided by guarantees, getting insurance can help us in multiple ways. Typical cargo insurance covers goods when they are in the transportation process via sea, road or air. Basic insurance provides cover against accidental damage to goods and related risks. The all-risk policy covers a range of specified accidents which includes damage during loading, theft, and negligence. The cost of insurance depends upon the following circumstances:

  • Value of the product in the transit
  • expiry date of the insurance policy
  • whether the journey is domestic or international

Multiple events can occur during transit that could lose you money if you're uninsured. For example, your hauler may be involved in an accident in which your goods are destroyed, or your goods might be stolen. The result can be loss of profits, productivity and buyer goodwill. You can minimize the impact of such incidents on your business by being properly insured or by having a guarantee to minimize the risk.

 

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Federation of Worldwide Chambers of Exporters and Importers