English Appendix
Electronic bonding
This article gives the results of a survey
conducted among the members of the
Asociación Panamericana de Fianzas
(Panamerican Surety Association) asking for
information on legislative and
standardisation progress on electronic
documents or electronic signatures and on
practical experience with electronic surety
bonds in various countries.
ENRIQUE FERNÁNDEZ
ACC SEGUROS
The result of this survey can obviously not be deemed complete; there are likely to be many other interesting cases that have not come to light. Nonetheless the final conclusions and the recommendations that close this article are still valid and useful.
The product we surety bond companies sell is fit for being issued and delivered online.
Before going further we should first establish what we mean by electronic bond.We need to take into account the three parties that necessarily intervene in surety bonds: the insurance company, the policyholder and the insured or beneficiary.Taken in pairs the intervening parties are linked by three different concepts, typically enshrined in three different documents: policyholder and insured by the contract or legal obligation dealt with in the insurance or surety bond, insurance company and policyholder by the insurance contract or policy, and company and insured by the bond strictly speaking.
The general title of the article, «Electronic bonding», could be applied not only to the contracting of the bond between the policyholder and company but also to the surety bond in itself between the company and insured.
Electronic contracting can already be said to exist in the relation between the policyholder and insurance company in different markets and with a fair number of insurers, inasmuch as the client’s initial surety bond application and the insurance company’s acceptance of the risk is carried out online, even though the final document reflecting said contract, the insurance policy, is still a signed hard copy.
In 2005, for example, the Spanish company ACC Seguros «contracted» over 52% of its policies on internet.
The crux of the whole surety bond process is the actual bond handed over to the insured, a document signed by an empowered agent of the company. If we could manage to replace the hard-copy document and handwritten signature by an electronic document and digital signature then we would really be speaking of fully fledged electronic bonding.And it is the electronic surety bond that would totally close the electronic circle in our sector.
Consideration should also be given to the different
names given in different countries to the surety bond
itself («garantía», «póliza», «aval», bond), the organisation
issuing it («compañía de seguros», «afianzadora», surety),
the client who takes it out («tomador», «afianzado»,
«fiado», principal or policyholder) and the one who
receives it («asegurado», «beneficiario», owner or
beneficiary).Throughout this article the terms mainly
used (in Spanish) are «garantía», «compañía», «cliente»
and «beneficiario» (in English: guarantee, company, client and beneficiary or owner) although the other terms also
put in an appearance, especially when referring to the
specific case of a particular country.
LEGAL AND TECHNICAL VALIDITY
Three requisites have to be met for the electronic surety bond to really exist:
- Security, by means of encryption and the digital signature, guaranteeing between them the authenticity, privacy, inviolability and non repudiation of the transaction.
- Legislation and standards investing these transactions with legal validity.
- Technological preparation and will of the insureds for accepting the electronic bond.
The first two prerequisites of electronic bonding, technological security and legislation, are closely bound up with each other, for all the various rules referring to the validity of electronic documents, brought out in various fields, also specify the technological requisites they need to meet.And all agree on the technology to be used: document encryption (or strictly speaking encryption of a summary of «hash» thereof) on the basis of the so-called public key infrastructures (PKI).These are then to be used for signing the digital signature certificates issued by the certification authorities, which have to meet strict controls of security and solvency. Without getting too bogged down in the detailed working of these technologies,we can claim that their use guarantees the authenticity and integrity of the documents thus signed, as recognised in the legislation of a growing number of countries.
To pre-empt the possibility of repudiation or rejection of the document authorship by its author, there are also time stamping services using the same technology and provided by trustworthy third parties.
These services add a signed time stamp to the electronic documents and complete the requisites needed for their full legal validity.
As for the digital signature certificates, these represent the union between the identity of the signatory, accredited before the licensed certifying authority, and the signature keys or digital signature thereof.As regards the signing of documents by the empowered agent of a company (in our case as authorised signer of the bonds), no clear specification has yet been made bringing together in the certificate itself the identity of the signatories and their powers in representation of a company.There is therefore still a need for a separate procedure for verifying powers of attorney.
These technologies allow the signing of any type of document, whatever their format, and give them validity. They can be used for a secure electronic interchange of «document images» (TIFF, PDF format or the like), calling for a reading or visual interpretation thereof, or for exchanging data (XML format).These can in turn be processed automatically by the document receiver and facilitate real B2B processes with the concomitant advantages of cost -and time- saving.
In diverse scenarios and countries steps are being taken to achieve electronic contracting in general and electronic bonding in particular. Let’s look at some examples:
- In the United States legislation both at federal level, with the Electronic Signatures in Global and National Commerce (e-Sign), and in diverse states with the Uniform Electronic Transactions Act (UETA), gives full legal validity to electronically signed contracts.The transport departments of several states, in the context of electronic contracting systems, are admitting some type of electronic bonding, albeit without including digital signatures, and some doubts might still be harboured about the effectiveness of the claims against these bonds.The Surety and Fidelity Association of America (SFAA) and the National Association of Surety Bond Producers (NASBP) have issued a recommendation encouraging the use of electronic bonding using the available digital-signature technology.There is now sure to be an avalanche of different formats and procedures, and attempts are being made to establish beforehand some validation standards and mechanisms to simplify the task of setting up electronic bonding systems and ensure interoperability between companies and beneficiary organisations.
- In the European Union the Electronic Signature Directive 1999/93 and the E-Commerce Directive 2000/31 have laid down the technical and legal bases for electronic contracting and procurement within the Union. Moreover Directive 2004/17 for the water, energy, transport and postal-services sectors and Directive 2004/18 for the award of public works contracts, public supply contracts and public service contracts enshrine community legislation on public contracts with a threefold aim of modernisation, simplification and greater flexibility of the regulation legal framework.They pay special attention to electronic procedures for awarding contracts, laying down special rules to ensure evenhandedness, non-discrimination and openness. The Action Plan eEurope 2005 urges member states to encourage e-government and sets the specific aim of generalised use of electronic contracting and procurement by the end of 2005. i2020 is the European Commission's new strategic framework laying down broad policy guidelines for the information society and the media. The European Commission has set three priority aims to be achieved by 2010: a single European information space, reinforcement of innovation and investment in the field of research into information and communication technologies (ICTs) and the building up of an information society and media based on social inclusion.
- In the case of Spain, the Electronic Signature Act (Ley 59/2003 de Firma Electrónica) and the Information Society and E-Commerce Services Act (Ley de Servicios de la Sociedad de la Información y Comercio Electrónico) represent implementation of the community directives into the national body of law and lay down the technical-legal requisites for the validity of contracts and documents signed online.The current administration is also acting as a driving force behind e-government, encouraging several projects in this field.The initiative likely to have most impact on electronic bonding is the electronic procurement and contracting project of the Ministry of General Government (Ministerio de Administraciones Públicas). Other regional governments such as that of the Basque Country have also made great progress in setting up their own electronic procurement and contracting schemes.
ACCEPTANCE BY THE BENEFICIARY
We have now established that the first two requisites for electronic bonding –technology and legislation– are already in place. Further headway will now depend on the rate of progress in the third. Prima facie , in a world dominated by information technology and communications, it might be thought that this acceptance would be swift. But one thing is the will to accept electronic bonding and quite another is the development and implementation of the suitable procedures for receiving and processing electronic bonds by the beneficiaries. One thing is the political will to encourage e-government and quite another is the existence of the «electronic window» for depositing the bonds.
Consideration must be given to several factors that might hinder the process:
- Firstly, the beneficiaries are a varied and variegated bunch. Not only is there a great difference between the public sector and the private sector.Within the public sector itself there are several different government levels in many countries (national or federal, regional or local) with a variety of bodies with their own powers, with a different level of technological development, different availability of resources, with different objectives and interests and often at loggerheads because of opposed ideologies. In the private sector the products whose beneficiaries are companies have nothing in common with those geared towards private individuals.
- Additionally, the beneficiary of the bond is often a «third party» bearing no direct relation to the insurance company, with the consequent difficulties of access and negotiation for establishing procedures and defining exchange formats.
All these factors make it clear that we are facing an initially sluggish and possibly never-ending process. Standard formats and procedures would obviously be desirable; once accepted by the different beneficiaries they would greatly facilitate the whole process. I believe this approach to be a pipedream, however.The standards will arrive in a second phase. Initially, I fear,we are in for a cumbersome phase of many small projects.
We will now make a detailed analysis of the two major groups of insureds.
PUBLIC SECTOR
As we have already pointed out,we are confronted by a host of different government levels, with their own decision-making powers and vested interests. In the Spanish case we have the central government, the 17 regional governments and the thousands of local councils, provincial councils and local corporations. In our favour, however, is the clear commitment of the general government towards e-government.A fundamental feature of this «group» of beneficiaries is that it is they who define the information exchange standards and communication procedures. It is crucial here that individuals and corporations are given the chance to participate in the projects underway to ensure that the particular features of our product are taken into account in the design of «electronic windows».This is one of the keys to success.
PRIVATE SECTOR
In the case of the private sector a distinction has to be made between company beneficiaries and private beneficiaries. Companies are faced with the same problems as the public sector in terms of diversity but perhaps without the same driving force towards egovernment. A factor they do have in their favour is technological development and the evermore widespread use of electronic services.The private sector will almost certainly have to wait for the advent of standards in the public sector that can then be transferred over with no great problems of acceptance. In any case, at least in our market, there are not many products with private companies as beneficiaries of the bonds.
Private individuals are certainly important to us as the recipients of the guarantees covering advanced payments in pre-construction house purchases.This is usually our most important business in terms of premium volumes and number of policies.The whole ongoing process will further be favoured by the increasingly common presence of computers with internet access in households and the imminent introduction of electronic IDs, which will include a personal digital signature certificate and signature encryption device.
Under Spanish law, whenever houses of any type are sold in design or construction phase, purchasers have to be given bank guarantees or surety bonds to cover any advanced payments they might make plus legal interest, in the event of the purchaser not receiving the house in the contractually agreed time for any reason.
To be able to hand over the guarantee to the purchaser, the housing promoter seeks the corresponding policy. Once the risk has been accepted by the company, after a due study of the client’s solvency and the viability of the promotion, these policies are then issued for each purchaser. In the traditional hard-copy procedure three copies of the policy are issued and signed and handed over to the client as policyholder.The latter signs the three copies, obtains the signature of the house purchaser and distributes the corresponding copies.To set up electronic bonding in this case the three copies would be replaced by an electronic document signed digitally by the company. It is not a complicated procedure to obtain also the policyholder’s digital signature upon handing over the policies electronically. Until such time, however, as an electronic identity document catches on and while the great majority of households still do not have a computer or internet access, the promoter is forced, at least in some cases, to print out the document and hand over a hard copy to the purchaser. At the moment of printing the document a reference or trace of the electronic signatures can be included but not the signature itself, so the printed policy has no legal validity.To get round this problem it will be necessary to furnish the insured with a mechanism for verifying the existence and validity of the policy, probably by means of time stamping thereof and custody by a trustworthy third person.
CUSTOMS BONDS IN ARGENTINA
The Directorate General of Customs (Dirección General de Aduanas: DGA), a dependent body of the Federal Public Revenue Administration (Administración Federal de Ingresos Públicos: AFIP), developed in 2005 a procedure for replacing hard-copy customs bonds by electronic guarantees and the automated processing thereof to speed up customs arrangements, cut down the vast amount of manual work and the volume of paper used.
The procedure includes a computer application made available to the guarantee-issuing companies for generating and sending the electronic file once the risk has been covered and also websites for management and enquiry of the furnished guarantees, by the guarantor companies themselves and by the importer (policyholder), the dispatcher of goods or the producer.
An additional benefit, deriving from the DGA’s automated guarantee process is the ease and speed with which they can be cancelled. After the policyholder seeks release and the DGA accepts it, the latter removes the guarantee from its records and the guarantor company receives an automatic electronic message allowing cancellation of the risk coverage.
The whole system works by means of authentication keys given by the AFIP to the various intervening parties.
The system was first brought in on a voluntary basis for companies in 2005 and became obligatory as from January 2006.The entire market is therefore now operating with electronic policies for guarantees of this type.
THE INSURANCE OF IN-CONSTRUCTION («EN VERDE») HOUSE SALES IN CHILE
In Chile a new law has recently been brought in to protect the purchasers of houses still in construction, who pay in advance tidy sums of money before actually being able to move into the house.The seller is now obliged to take out a guarantee to cover the sums paid in advance and formalise the contract of sale before a notary public, who has to verify the existence of the guarantee.This serves as some protection of the buyer if the seller fails to hand over the house on time.
To speed up the guarantee-issuing process a system has been developed in Chile for requesting and issuing them online.The companies study the solvency and professional proficiency of the clients and grant them preauthorised limits.The electronic guarantee application is then made within these limits and approved manually or automatically by an insurer and sent by email to the policyholder, either in readable and printable PDF format or in electronically processable XML format, and signed by the company with an advanced electronic signature.
This system is topped up with websites for access and enquiry, both for the client and the beneficiary, the purchaser of the dwelling, who can check up on the guarantee and the exactness of the data.
The electronic system has now won out on the market over the hard-copy system due to the obvious advantages of speed and cost saving. It now accounts for 90% of the policies of this type.
ELECTRONIC SURETY BONDS IN KOREA
The Seoul Guarantee Insurance Company, Korea’s only guarantee issuing company, has developed an online bond-issuing system as a complement to its internetbased bond-application system. It is valid only for some products and for bonds worth under U$S 50,000.
To issue the bond the company requires the client’s electronic signature. Once the bond has been generated, the client can print it and hand it over to the beneficiary or send it on electronically to the beneficiaries connected directly to the company’s system.
In 2005 a total of 79,023 electronic bonds were issued, representing 5% of the company’s total bonds.
SGIC is developing a system for simultaneously connecting up the policyholder and the beneficiary with the company for entering into the contract electronically and also the subsequent subscription of the risk and issue of the bond, also online.
GUARANTEE COVERING HOUSE PURCHASERS’ ADVANCE PAYMENTS IN SPAIN
As in Chile, it is also obligatory by law in Spain (and has been since 1968) to take out a guarantee covering the advanced payments made by house purchasers while the houses are still under construction.These advanced payments are not formalised before a notary public, however. In Spain the notary public intervenes only at the moment of effectively handing over the house to the purchaser, when all construction work is over.
Surety bond policies covering the guarantee are a three-party contract (company, policyholder and beneficiary) and are traditionally signed by all three of them.
Once the company has accepted the risk, the policy is electronically issued in XML format; an empowered agent of the company signs it with an advanced electronic signature and the client is informed by email.
Clients can check over the policy through a client extranet, sign it with their advanced digital signature certificate and enter or confirm the beneficiary’s email address.
The latter will receive email notice together with a link giving it access to the policy. If it has a digital signature certificate (this is fairly commonplace in Spain for submitting tax returns by internet and a start has also been made on the process of issuing electronic IDs including a digital signature certificate) it can also sign the policy.
Once the three signatures have been obtained the signed policy is sent to a certification services provider, who acts as an electronic notary public, verifying the authenticity of the document, the validity of the certificates used, and adds a time seal, signing the resulting total file with its own electronic signature.The final electronic document is filed in the company’s servers and is made available both to the policyholder and beneficiary.
If neither the policyholder nor the beneficiary has an electronic signature certificate to be able to sign the electronic document, or if they prefer a hard-copy document, they can ask for the document to be generated in PDF format. In this case the electronic policy is sent to the service provider with the electronic signatures it has up to that moment to be electronically certified.A PDF image of the policy is then generated including the final time seal and the titles of the other signatories, to be able to close the whole process in handwritten form.
ELECTRONIC SURETY BONDS IN HOLLAND
The surety bond company Nationale Borg of Holland, within its BorgOnline system for internet bond contracting, issues electronic bonds for some products with an advanced electronic signature.
MEXICO:A GROUNDBREAKING INITIATIVE
In early 2006 the Mexican surety company Aserta began to issue its bonds in electronic format using an advanced electronic signature.This was part and parcel of Mexico’s recent process of modifying its legislation and standards (Civil Code, Federal Code of Civil Procedures, Commercial Code, Federal Consumer Protection Law, Federal Law of Bonding Institutions) to bring electronic documents on a par with hard copy documents in terms of their recognition and regularisation.
The company receives the bond application by any means, not necessarily online, analyses and accepts the risk and then issues the bond in XML format, signs it with an advanced electronic signature and sends it to the client by email.To encourage acceptance of the scheme the email also includes an image of the bond in readable and printable PDF format, including the data of the electronic signatory, of the certificate vouching for the signature and of the certifier.
The company has also set up a system whereby the client and beneficiary can check the authenticity of the bonds received, both the electronic bond in XML format and the hard-copy or PDF image, against the originals kept on the company’s website.
Liaison has also been set up with private and official beneficiaries to bring home to them the advantages of the electronic signature and encourage its acceptance.Given that it is a trailblazer in its market, Aserta is trying to get the rest of the companies in its sector to accept its electronic bonding models, thus establishing standards that might facilitate its more widespread acceptance.
PUBLIC E-PROCUREMENT AND -CONTRACTING IN THE UNITED STATES
We have no information on any specific case of electronic bonding in the United States. Nonetheless diverse e-procurement and -contracting systems admitting electronic bonding with different formats have cropped up in federal and state bodies.This has prompted the Surety and Fidelity Association of America (SFAA) to issue not only the recommendation already mentioned in the paper «Electronic surety bond contracts», encouraging the use of electronic bonding, but also the E-procurement Bidding/Bonding Guidelines.These guidelines have been accepted by the main associations of American constructors and sent by the Federal Highway Administration to the transport departments of all the states.
These guidelines lay down recommendations for communicating the bid invitation, receiving, opening and analysing the bids and then awarding the contract. There are also some specific recommendations on bonds.The most important for the purposes of this report are the following:
- The methodology must guarantee the integrity of the document, the identity of the signatories, including the data of the empowerment of the issuing company’s empowered agent, the validity of the certificates and the non-repudiation of the document.
- The document should be securely stored and freely available for all parties.
- The signatures of the policyholder and issuing company must be incorporated; these signatures might have been given at different points in time.
- The ACORD standard (Association for Cooperative Operations Research and Development) formats must be used in relation to the electronic transactions.
- It must be possible to graft the system on to the IT systems of all parties involved.
- A trusted third party has to certify the delivery of the bond and signatures.
Additionally, with the aim of verifying the powers of attorney granted by companies to the signatories of the bonds, the SFAA is beginning a project for the creation of a Central Power of Attorney Repository.
CONCLUSIONS
Valuable conclusions can be drawn from the above case analysis:
- Electronic bonding is here to stay and is going to have a significant impact on the way the surety business is carried out.
- The necessary technology is now tried and tested. There are internationally accepted standards for the different needs of the process (electronic document format, certification bodies, signature certificates and process, time seals...).
- In most countries with surety bonds legislation now caters for (or soon will) the full validity of electronic documents signed with an advanced electronic signature.
- Where the system has been set up on the initiative of the companies themselves, it is usually based on standards (XML format and advanced electronic signature) that guarantee widespread acceptance and interoperability between the systems of the various parties involved and also include a printed image (PDF) for ease of reading and to smooth the way for a gradual transition.
- When the system has been set up on the initiative of the beneficiary, especially when it is a public body (such as the Argentinean custom bonds), a «private» system has been developed with its own format, issuer authentication, not by advanced electronic signature but rather by a system of keys furnished by the beneficiary. The bond is also sent by an application provided by the beneficiary. Even though such systems have sped up processes and cut costs, they will not be replicable for other products or other beneficiaries, obliging companies to use different systems, procedures and formats to suit the receiver of the bond in each case, with the consequent (exponential) increase of complexity and costs.
- In those cases in which legislation or habitual practice calls for only the company’s signature in the bond, the system is relatively simple. Things get more complicated, however, when the policyholder’s signature is also required (Korea, USA) or even the beneficiary’s (Spain). This then calls for a more complex system to allow the remote signing of all parties involved and also requires the generalised availability of digital signature certificates. This availability is being favoured by the growing use of government online procedures, especially for tax purposes, in many countries. This encourages individuals and companies to obtain a signature certificate. Other countries in the European Union are also bringing in electronic IDs incorporating an advanced signature certificate in their chip, and this is further facilitating the whole process.
THREATS AND OPPORTUNITIES
As in many other cases of change and progress down the ages we now stand at a juncture that is full of opportunities but is also beset by some threats.
In my opinion, the biggest problem facing us at this time is the overlapping of a whole host of different egovernment initiatives by the governments of many countries in an attempt to modernise their procedures and offer their citizens better services at a lower cost. There is, however, a dearth of standards and this might lead to a situation of overwhelming complexity for companies if each body develops its own procedures.
To convert this threat into an attractive opportunity, therefore, there is now an urgent need for developing and adopting a series of recommendations and standards, with all the international associations working together (PASA, SFAA, ICISA...).This would allow the companies making up those associations to participate in the design of electronic bonding products in their respective countries.