The International Credit Insurance & Surety Association (ICISA) and the Panamerican Surety Association (PASA) have jointly published a new white paper addressing one of the key challenges in the surety industry — the Extend-or-Pay clause and its implications for long-term contracts.
A critical issue for the surety market
Surety bonds play an essential role in supporting long-term projects such as infrastructure development, renewable energy plants, and telecommunications concessions. These contracts often extend beyond the term of the guarantee, creating uncertainty for insurers and reinsurers.
ICISA’s latest white paper, “The Extend-or-Pay Clause: Implications and Risk Management in Surety Underwriting”, provides a clear overview of how this clause affects risk exposure, reinsurance coverage, and contractual obligations within the surety ecosystem.
Understanding the Extend-or-Pay clause
An Extend-or-Pay clause is a provision in a bond wording, contract, or regulatory framework that allows the beneficiary to claim payment if the bond is not renewed or extended at its expiry date. While this ensures continuous protection for the beneficiary, it can also extend the insurer’s liability beyond the initial guarantee term.
The white paper identifies several types of contracts that commonly include Extend-or-Pay clauses, such as:
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Concession contracts for infrastructure or renewable energy projects
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Judicial and decommissioning bonds
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Tax and pension bonds
Implications and risks for the surety industry
The paper highlights the main risks associated with Extend-or-Pay clauses:
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Continued liability beyond the bond’s original duration
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Potential financial loss if the underlying obligation is incomplete or terminated
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Reinsurance implications, including exclusions or limited coverage
These factors can significantly affect insurers’ underwriting and reinsurance strategies, underscoring the need for transparency and coordination among all parties involved.
Mitigating the risks
To help the industry address these challenges, ICISA’s paper outlines several risk mitigation strategies, including:
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Ensuring transparency between insurers and reinsurers
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Establishing clear expectations with clients and brokers
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Monitoring project progress and client solvency
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Securing strong counter-guarantees and indemnity agreements
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Reviewing reinsurance treaties to confirm adequate coverage
Supporting sustainable surety underwriting
The Extend-or-Pay clause is a critical consideration in surety underwriting, especially for long-term and high-value contracts. By understanding its implications and applying robust risk management practices, insurers and reinsurers can mitigate potential exposures and strengthen confidence in the surety market.
Developed in close cooperation between ICISA and PASA, this white paper brings together expertise from both associations to provide practical guidance and insights for insurers, reinsurers, and brokers operating in the global surety industry.
Download the full white paper
The full publication, “The Extend-or-Pay Clause: Implications and Risk Management in Surety Underwriting”, is now available on the ICISA websiteand can be downloaded via Download button below.
