Surety Bonds And The Economy

While the economy plays an important part in many industry successes and failures, it plays a more crucial role in the industry of surety bonds. Over the years, the surety bond market has overcome many obstacles in order to achieve its hard earned and trusted status. Some of these obstacles have devastated surety bond companies, while others have made the industry stronger and much more secure. As the millennium came to its end, we can all recall the unbelievable successes of businesses worldwide. Unfortunately, by the end of 2000 the economy came to slowing halt. Contractors began to experience, first hand, the frightening effects of a slow economy. With contractor’s businesses failing rapidly, there was no stopping the abundance of claims being filed. This is not to say that the economy is the origin in the increase of claims, but its supporting role initiated the domino effect.

Among the many dominoes that have triggered the current hard market, the practicing of loose underwriting had been discovered. Loose underwriting guidelines promoted a way for surety bond companies to generate more premiums, which in turn allowed contractors to be approved for bonds they were not eligible for. Crafty surety underwriters began to produce bonds which should have never been thought of, let alone written, even for the best contractors available. There were maintenance bonds written that exceeded 5 years, where as today a 3 year bond is a common maximum. To put it simply, the sureties grew too greedy for business and lived way outside of their means resulting in one more domino to lose balance.

The bonding companies were responsible for setting up the dominoes in such a way that if one dares to fall the others will follow suit. While the softening economy may have been the first domino to fall, there are plenty others that have made a lasting impression on the industry.

In the past, the surety bond industry saw an approximate 25% in losses. In 2001, the industry saw a staggering 82% loss for the year. In 2002, the industry produced $3.7 billion in premium; however the industry as a whole showed a devastating 70% loss. The 2002 Insurance Expense Exhibit reported the industry losing more than $2.5 billion from 2000 – 2002. AM Best voted many bonding companies as “junk� due to the amount of losses. Other companies called it quits and closed their doors permanently. For those who were able to stay afloat in this sea of disaster, they quickly changed their ways. Underwriters returned to more traditional guidelines and took proper precautions when reviewing account information. Overall, the entire industry became more vigilant about their use of capital and contractors have since seen their bond lines reduced.

There are many contractors feeling the frustrations of the current bonding limitations and are seeking new agencies to fulfill their desires. But keep in mind that most, if not all, bonding companies are following very similar guidelines. Although bond lines have been reduced, the value of a bond has since been improved due to the conservative underwriting practices. Contractors can no longer obtain the bonding required to participate unless they are financially qualified. Now, for contractors who are financially healthy this is a great way to keep their businesses strong.

Also keep in the mind the importance of having a bond agent that truly understands suretyship. A surety bond agent should be able to give sound advice in order to improve a contractor’s financial situation and also expand the businesses growth. A good agent does more than just write bonds, they consult and advise contractors to make changes so the bonding companies have fewer risks, increasing bond capacity and lowering premium rates. A contractor must be comfortable with their agent and trust that their agent is knowledgeable enough to guide them in the right direction.

Once the dominoes were picked up and placed back in order, the surety bond companies have seen a new light. The new limitations and guidelines may not have everyone jumping for joy, but in the long run most businesses will reap the benefits. The economy will always remain a key factor in business production; it’s a fact of life. Just be sure to keep your domino grounded when that first one begins to wobble.

Eric is the Chief Marketing Officer of JW Surety Bonds. With years of experience in the surety industry, he is also a contributing author to the surety bond blog. He has held a range of different roles within the surety industry, from agent assistant to bond issuer, which gives him a unique insider perspective on surety related topics.

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