The Surety Bond Domino Effect

Many articles have been written about the market for hard surety bonds. Many people want to know how we got here. The economy is a major influence on the surety bond market, as it is with all industries. The strength of the US economy towards the end of 2000 is something we all can recall. It seemed like every corner was a haven for prosperity. The economy started to slow down by 2000. Changes in the economy directly affect the success of any contractor. As a result, more contractors’ businesses started to fail. There was an abundance of claims after the contractors’ businesses failed. Although this does not mean that claims rose solely because of the weak economy, it is the beginning of a domino effect.

What were the actions that set the stage for the other dominos to activate the current hard market. To generate premium bonds, companies employed very loose underwriting guidelines. Contractors were able to get bonds that they did not qualify for by following loose underwriting guidelines. Not only did the sureties write bonds for contractors who do not meet their qualifications, but they also wrote bonds that were inappropriate for even the most skilled contractors. Maintenance bonds that lasted more than 5 years were much more common. These days, anything longer than 3 years is almost unheard. Simply put, the sureties became too greedy for business and wrote things they shouldn’t have.

The dominos were set up by bonding companies and the softening economic environment started the chain reaction that saw them all fall. What happened to the bonding companies’ profits? The surety bond industry has suffered losses of around 25% in the past. The industry suffered a staggering 82% loss in 2001. The industry generated $3.7 billion in premiums in 2002, but the industry as a whole suffered a 70% loss. According to the 2002 Insurance Expense Exhibit, the industry lost more than $2.5 Billion between 2000 and 2002. Many bonding companies were downgraded by AM Best to junk status, and had to be closed permanently as a result. The rest of sureties quickly took notice and changed their ways. The traditional underwriting guidelines have been reintroduced by underwriters who now go through accounts with a fine tooth-comb. The whole industry is now more careful about how capital is used. Contractors have seen their bond lines decrease for both single contracts and aggregate capacity.

Contractors who are dissatisfied by their current bonding restrictions are not alone. Contractors often compare their current situation to the one they had two years ago and then search for an agency that offers similar terms. Remember that every cloud has its silver lining. Although bond lines have been reduced due to conservative underwriting practices, the bond’s value has increased. Contractors can no longer get the bonding they need to participate in contracts that they aren’t financially qualified for. This is only an advantage for contractors who are financially stable.

Contractors need to find an agent who is knowledgeable about suretyship. An agent who is a surety bond specialist should be able give sound advice that will help improve your financial position and grow your business. An agent who is skilled in writing bonds does more than just write them. They also consult contractors to make adjustments so that the bonding companies are less risky, increasing bond capacity, and decreasing premium rates. Contractors must feel confident that their agent can help them make the right decision in today’s surety bond marketplace.