Surety Bonding Industry Changes to Accommodate Losses

After 12 years of unprecedented profitability, the surety industry has experienced significantly increased losses over the past two years. Sureties are now more cautious about bonding large-scale, long-term contracts. It's no longer a buyer's market: The surety industry is changing.
Since 1998, five of the top 10 surety companies have consolidated or completely left the market. However, consolidation and contraction have had little impact on the surety industry's ability to meet the needs of the construction industry. With close to 300 surety companies in the market today, the capacity is there to handle any qualified contractor.

However, there may be changes in the level of surety credit contractors receive. Surety companies are providing more conservative underwriting standards; surety bond professionals are serving as advisers and consultants to the contractor; and contractors are focusing on managing their business and looking at profitability over growing their businesses.

The surety bond premium is a fee for the surety's underwriting service. Surety underwriting still uses the Three Cs - Capital, Capacity and Character - as the basis of its underwriting process. In addition to looking for contractors who will stay in business and make a profit, sureties are looking for long-term relationships that will allow for more informed decisions by both parties. Contractors will be asked for more information than in the past and sureties will have less tolerance for delayed or incomplete information.

The value of surety companies and surety bond professionals to the contractor lies in the service they provide. Sureties and professional surety bond producers can be valued partners. Their role is more consultative than during the1990s when surety was viewed as a commodity. The surety and professional producers can provide knowledge and insight into the construction process. Contractors with a competent surety company not only receive surety credit, but also get advice, guidance and evaluation of their strengths and weaknesses based on the surety company's in-depth knowledge and experience with other contractor clients. A good surety company or producer can also discuss an owner's reputation for paying contractors. They can prequalify an unfamiliar subcontractor, and they can help the contractor deal with claims.

The biggest mistakes contractors made in the 1990s were viewing surety as a commodity. They would move from one surety to another to get the best rate. The contractor and surety did not build an allegiance. Surety is not a commodity; rather it is akin to financial credit. Contractors should choose a surety just like they would choose a bank. Surety credit provides the contractor the opportunity to generate work. Long-term surety relationships pay big dividends for contractors in the current market, because it enhances the chance of retaining maximum surety credit during difficult times. Maximum surety support goes to contractors that sureties have confidence in and understand.

In order to build a lasting relationship, contractors should make sure they have a professional producer who understands the contractor's industry and has a profound knowledge of the surety product. Contractors must treat the surety relationship not as a vendor-commodity distribution, but rather as an adviser-service relationship. The principal-owner should not be the only person the surety interacts with. Introduce key management personnel, next generation personnel, financial management and contract management to the surety. Contractors should meet with their surety at least twice a year. With open and frequent communication, your success in the current

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