Surety: Market Stable for Time-Proven Protection

The concept of Surety as a financial instrument to guarantee one party’s debt to another dates back thousands of years. Clay tablet etchings of a farming contract from around 2750 BC and documentation in the Code of Hammurabi (circa 1792-1750 BC) reflect its ancient origins. 

More recently, the U.S. Senate unanimously passed a Surety bond amendment, mandating surety bonds for all TIFIA-financed infrastructure projects. Surety has long been crucial to society, playing a key role in iconic projects such as the construction of the Hoover Dam and the Golden Gate Bridge.

According to the Surety and Fidelity Association of America, bonding not only helps prequalify contractors — saving valuable project time and money — but also helps ensure superior performance compared to construction projects without bonds. 

Surety offers financial security and assurance to the “obligee” (the person or entity requiring the bond) for the “principal” (the person or entity needing the bond) to fulfill their obligation across a broad range of activities, including building new homes, performing notary services and signing bid contracts. 

While the Surety market remains stable overall, the dual economic pressures of rising inflation and increased construction costs could impact a principal’s ability to pay or complete projects on time. This underscores the economic value that Surety bonds provide in protecting your financial interests and ensuring timely project completion. 

Economic uncertainty and Surety bond cycle

Rising inflation, increased construction costs and the depletion of Paycheck Protection Program (PPP) loans have created a challenging cycle for contractors. These factors heighten concerns about profitability and project viability. 

Despite these challenges, bond capacity is trending favorably for buyers, particularly those with well-managed accounts, strong financials and robust business plans. Financially challenged businesses, however, may struggle to qualify for Surety. 

What’s ahead

For most businesses, Surety bond pricing this year will continue to remain consistent with 2023 levels. Highly qualified buyers, characterized by strong balance sheets and favorable loss experience, will generally avoid rate increases. In contrast, businesses with weaker financials or less-favorable loss histories will experience more stringent underwriting and may encounter rate increases.

Here’s what Alera Group said in our 2024 Property and Casualty Market Outlook about other factors influencing the market for Surety: 

• “Buyers will find ample availability as new markets enter this line of business. Markets will compete for accounts with favorable balance sheets, good loss history and projects that match their capabilities.
• “Capacity will be adequate at relatively stable pricing and terms. Insurers will allocate capacity to buyers who demonstrate relevant project experience and are in a strong position financially.
• “Underwriting will be favorable for buyers with satisfactory liquidity, cash flow and profitability. Underwriters will continue to require sound business plans, qualified management, favorable loss experience and good project-completion records.
• “There is no significant change in underwriting requirements. But additional scrutiny will be given to smaller contractors in labor-intensive sectors, those relying on heavy equipment, and contractors that have projects with long lead times and no price escalation clauses.”

Avoiding claims with proactive risk management 

In the context of Surety bonds, the primary focus is on claim severity, which can be substantial, as large bond claims can exceed $100 million. Unlike insurance, which focuses on both frequency and severity, Surety emphasizes severity because of the potential for large claims to significantly impact an insurer’s profitability. 

A common issue in construction bond claims is the failure of project owners to pay the construction company, leading to a downward spiral for the project. This underscores the importance of securing bonds and the need for thorough vetting and continuous monitoring of a project’s financial health. These measures help mitigate the risk of non-payment and subsequent claims. 

Building strong relationships with project owners, subcontractors and suppliers is also crucial for risk management. Ensuring that all parties are paid promptly and treated fairly fosters a cooperative and efficient work environment. Establishing these relationships, particularly with reliable subcontractors, is key to maintaining project stability and success.

Staying informed and proactive is essential for early detection of potential issues, preventing problems from escalating and keeping projects on track. 

Partnering with specialists for a robust support system 

Partnering with a specialized Surety broker in your business sector further safeguards your project from default. For instance, if you’re a general contractor, it’s beneficial to find a broker who is actively engaged in the construction industry and stays updated on construction risk management trends. A broker with extensive Surety experience and strong relationships with primary markets can provide invaluable support and increase the likelihood of project success. 

A full-service broker with dedicated Surety teams for customer service and claims management will be more advantageous to you. The nature of bonds differs from traditional insurance products and often necessitates expedited support, including the hand-delivery of live documents. 

In addition to partnering with a specialized Surety broker, it is important to build a professional team that includes an attorney and an accountant who is well-versed in your industry. A knowledgeable construction CPA can offer insights into the viability of projects, while an experienced construction attorney can help navigate legal challenges. The Surety broker, as an integral part of this team, plays a pivotal role in protecting your financial interests and securing contracts.   

Overall, a strong professional network ensures comprehensive risk management and significantly contributes to the long-term stability of a business.

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