Page 340 - Evento Guatemala 2012

Section 1: Description of the risk

The first section covers twenty-one data items. It is important information to have a clear
understanding of all the aspects involved in this transaction. The twenty-one data items are
split into four items, namely, contract data, surety bond data, collection terms and other data
items.

Contract data: the contract amount and description as well as the beneficiary are included.
In this item we have added the bond percentage in relation to the contract amount since the
bond percentage required differs from one country to another. Then we have the contract
effective and expiry dates. The case of a call for bids is dealt with: when we are asked to do a
fronting transaction or we request fronting for a bid, on many occasions it is, for example, for
USD 200,000 and we do not take into account that if the principal is awarded the bid, the
contract will amount to USD 10 million. For that reason we recommend making a thorough
analysis including all the bonds needed to cover the contract that is being bid and even taking
into account all the contracts the company intends to enter into in that foreign country.

Bond data: it includes the type of currency and the amount, which is very important information
about the exchange rates of the different currencies, and the bond wording and life.

Collection terms: it includes rates, payment terms, place of payment and fronting fees.

Other data items: here we think it is of utmost importance to know whether the principal has
had any experience in this type of international operations; suppose it is a Mexican principal
that is a building company and has already worked in, for instance, Panama. It is very important
to know whether he has duly completed the project and everything has been as expected. This
allows us to know about the governing laws: how the beneficiaries work, how all this process is
developed. It is important that a company has experience in the different countries. The data
of the person the bond should be submitted to, on behalf of the bonded company, are also
included.

Section 2: Terms and agreements

In this second section, the instructing company unconditionally and irrevocably agrees, as it
has always done, to pay any claim. However, we have added three major conditions: (i) any
change or amendment to the bond should be approved by the instructing company; this is
key. The fronting company should immediately inform of any notice, whether prior or of any
other type. (ii) The instructing company should be automatically released from any liability
related to this reinsurance contract when the fronting company has also been released from
such liability. (iii) Finally, it is understood and agreed that this bond shall be governed by the
laws of the country where the issuing company has been incorporated, and the instructing
company irrevocably submits to this jurisdiction.

338 Asociación Panamericana de Fianzas / Panamerican Surety Association