Research

Insurance Marketplace Realities: Surety

2018 Spring Update on Commercial Insurance in North America

April 12, 2018

Price prediction

  Trend Range
Surety: No change Flat

Key takeaway

As the portability and flexibility of surety products change to meet the innovations in contracting methods, global fluidity and rapid delivery, surety will become a strong financial product looking much less like a statutory necessity.

Surety companies are expecting 2018 to be another year of record growth and below-average loss activity.

The marketplace remains healthy but continues to evolve.

  • Surety premiums continued to increase through the third quarter of 2017 to $4.7 billion with a 14.9% loss ratio, compared to $4.4 billion with a 15.1% loss ratio in the third quarter of 2016. Total written surety premiums in 2017 are expected to exceed $6 billion. While the top ten carriers write nearly 63% of overall surety premiums, aggressive new players in the surety industry will continue to saturate the market, softening underwriting terms and conditions, though prices are expected to remain flat.
  • We are beginning to see the acceptance of bonds executed electronically by more public and private entities, offering efficiencies for all parties.
  • In early 2018, we saw the liquidation of the second largest contractor in the U.K., Carrillion. While their U.S. obligations have not gone into default as of yet, the unrealized project failures may restrain and refocus underwriting requirements for global contractors.
  • Leading U.S. sureties are now global, with significant premiums outside the U.S., which improves premium growth and profits. Major global sureties are expanding their non-U.S. teams and creating an aggressive market for international business, especially in LATAM.
  • We anticipate recent M&A activity (e.g., Liberty Mutual acquiring Ironshore, Markel acquiring Suretec, Tokyo Marine acquiring HCC ) to continue in the surety marketplace in 2018.

New opportunities for new business and new uses of surety lay ahead in 2018.

  • Sureties are aggressively pursuing new business as the construction economy continues to recover. The number of sureties competing in the middle-market construction space is at an all-time high, increasing rate competition and capacity within the industry.
  • We continue to see alternative procurement methods such as P3 becoming more prevalent, with more than 30 states having some form of P3 legislation. While conventional surety bonds continue to support billions of dollars in P3 projects, lenders remain focused on having more liquid security than traditional surety bonds typically offer. Several sureties continue to work towards addressing this demand for liquidity with the rating agencies and lenders.
  • As the banking industry continues to stretch to meet capacity needs, we are seeing a growing use of surety in place of bank guarantees as well as pay-on-demand facilities for international projects (in Australia, EU, South Africa and South America) and more opportunities to assist on non-construction financial and performance guarantees. Since surety remains the most cost effective form of capital, many companies are maximizing their surety capacity to replace ILOCs and release restricted capital at preferred terms.

The marketplace is not without challenges.

  • Short-term and long-term labor shortages in the construction market will remain a top focus for contractors, as will managing the increasing cost of materials.