A Surety Thing: Stricter Underwriting in Otherwise Stable Insurance Bonds Market

February 23, 2021

On the turbulent sea that is the current Property and Casualty Insurance market, Surety has been a stable and steady vessel. Even amid the storm of disruptions caused by COVID-19, Surety bonds have continued to provide safe transport to projects embarking through uncertain waters.

As the coronavirus pandemic worsened last spring, threatening businesses including the ones most in need of Surety – those in the construction industry – fears escalated that the market for bonds would harden along with most other Property and Casualty lines of coverage. Yet, two developments appear to have averted a wave of Surety claims:

  • A much-needed infusion of federal cash from Paycheck Protection Program (PPP) loans

  • The cooperation of partners determined to weather the storm and see their projects through to completion.

As the firm Robinson+Cole’s Construction Law Group wrote in a December article published on the business- and law-focused website JD Supra:

“Despite … project delays/cancellations and work slowdowns/suspensions, just as the concern that construction activity would grind to a complete halt in 2020 did not materialize, there has not been any reported significant increase in Surety claim activity directly attributable to the pandemic, as some initially expected. This appears to have been due, at least in part, to the fact that project participants have been able to negotiate equitable sharing arrangements for the additional costs caused by the stay-at-home orders and work shutdowns in the form of delays, reduced productivity, and health and safety compliance costs.”

No shortage of challenges remains for the construction industry in 2021 – including greater scrutiny and selectivity by Surety underwriters – but for those who can meet underwriters’ heightened standards, Surety is likely to maintain a steady, strictly adhered to course.

The Outlook Entering 2021

Here’s the outlook for Surety as outlined in Alera Group’s Property & Casualty 2021 Market Outlook whitepaper, released in December 2020:

► The Surety sector is coming off a decade of profitable growth, relaxed underwriting and significant surplus growth.

► The sufficiency of capital and prior underwriting profitability likely ensures sufficient market availability and capacity for 2021.

► Because of the economic uncertainty that influences construction and Surety markets, expect to experience a tightening of underwriting and more rigid selectivity requirements from insurers.
  • Emphasis will be on liquidity and cash/cash flow, and credit.

  • For general contractors, focus will be on financial health, quality and financial strength of subcontractors and the amount of work in the pipeline.

► Underwriters will give extra attention to businesses most heavily impacted by the COVID-19 pandemic, such as retail, hospitality and travel, due to liquidity concerns.

► Unknown favorable impact could come from a federal stimulus bill and/or financial support for infrastructure improvements.

Buyers of Surety bonds were likely to face increased underwriting scrutiny and selectivity, the Market Outlook noted, but projected rates, availability and capacity all indicated a stable marketplace.

To obtain the entire Property & Casualty 2021 Market Outlook whitepaper, click the link below.


What’s New

Although much has happened since Alera Group released its Market Outlook and Robinson+Cole published its relatively optimistic overview, little has changed in the outlook on the Surety market for the construction industry.

As Alera Group colleague Kurt Sokolowski of TriSure recently wrote, the construction industry in 2021 faces a good news/bad news scenario. The good news: the promise of an improved economy and green lights on delayed projects, continued progress in the battle against COVID-19 and an expected surge in infrastructure construction spending. The bad: a further-hardened P&C marketplace and endangered status of countless subcontractors.

Additionally, the rising costs of building materials and a shortage of skilled workers mean that contractors will be forced to operate with reduced margins, all the while facing the possibility that their subcontractors will be unable to honor their bids and commitments.

Assuming delayed projects do proceed and Biden administration plans for infrastructure construction projects come to fruition, Surety bond underwriters have a busy year ahead. As Business News Daily reports, “Under the Miller Act,” which became law in 1935, “contractors providing construction, alteration or repair services for federal building must have a surety bond for contracts that exceed $100,000. The Little Miller Act is the state version of the federal rule, requiring companies to have a bond when doing work on state buildings or bidding on state contracts.”

Ten large insurance carriers issue about 60 percent of all Surety bonds. They are highly selective in their underwriting approach, pricing and issuing bonds with no anticipation of losses. Based on this, we anticipate underwriting to become more detailed within this busy Surety marketplace.

What You Can Do

Be prepared to provide underwriters with the records, detailed business plans and forecasts they request. Underwriters will want to fully understand a client’s cash flow needs and projections before issuing a bond, and you should expect them to closely monitor your organization’s financial health and each project’s progress throughout its duration.

“The traditional ‘Three C’s’ of surety bond underwriting – capital, capacity and character – remain of paramount importance to the underwriting process,” noted the Robinson+Cole Construction Law Group, “and, of course, well-capitalized, historically-successful, reputable contractors remain the most credit-worthy type of bond applicants.”

Work with a well-established professional Surety agent who knows your industry, your region and your business – and who has the resources to access markets unavailable to others. Working with an Alera Group representative ensures both local service and national scope.

Gain a better understanding of commercial property insurance ratings. Alera Group’s brief guide provides insight on contributing factors such as construction, occupancy, protection and exposure.

                                                       GET THE PROPERTY INSURANCE RATINGS GUIDE

About the Author                             

Rob Striewig

Senior Vice President, Property and Casualty

AIA, Alera Group

Rob Striewig is a Senior Vice President in AIA, Alera Group’s Property and Casualty division.  He specializes in managing and negotiating the domestic and international contract/commercial Surety programs between clients and Surety companies throughout the United States.  Known as a trusted, professional and confidential business partner, Rob is able to provide ongoing strategic advice, working closely with clients and their other advisers.

Rob served as President of the Striewig Bonding Agency for more than 30 years prior to joining AIA, Alera Group as one of the principals in 2017.  He currently serves as a director on several boards within the industry and previously served on several national advisory boards. Rob is a past president of the MBX (Mid-Atlantic Builder’s Exchange) and is currently chairman of the annual scholarship event conducted by the Central Pennsylvania chapter of the Construction Financial Management Association (CFMA).

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