Searching For a Surety Partner? Look For Someone Invested in Stability for the Years to Come

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Posted by: CMR April 6, 2023 No Comments

While insurance products exist to help an insured in the event of a loss, surety bonds are purchased so that a customer can guarantee their work on a particular project will be completed within a certain timeframe and at a reasonable cost.

Bonds support everything from a guarantee that a construction project will be completed on time to license and permit products that ensure a company will operate following any specific laws and regulations. If a surety customer is unable to complete these requirements, their surety partner will step in to cover any financial obligations.

Governments often require surety bonds for businesses to become involved in a particular contract. If a contractor wants to bid on a project to build a highway, for example, they will be required to purchase a bond to guarantee the work will be completed.

Since businesses are often required by law to purchase surety bonds, it’s important they find a carrier partner that’s able to offer consistency and stability over the long term. Look for underwriters who thoroughly consider your business model, and who remain abreast of challenges like supply chain risks that could cause project delays.

Why Consistency and Stability Are Key for Surety Customers

Since surety bonds are often a statutory requirement, contractors and other commercial customers are looking to build long-term partnerships with the institutions issuing their bonds. Rates may be rising in traditional insurance markets, but Delisio says that BHSI’s surety rates are “fairly stable,” something surety customers — from contractors to airlines — appreciate.

“You tend to have long-term relationships,” Delisio said. “What really makes that alignment is understanding their strategy and understanding where they want to go with their business.”

In order to create consistent and stable surety capacity , underwriters need to have a full understanding of an organization’s business model and the risk it needs a bond to cover. Some underwriters rely on credit models to select which surety risks they’re comfortable with, but Delisio believes that to truly make the long-term commitments necessitated by bonding institutions requires a longer view.

Credit models often offer only 12-month projections of financial performance, but the projects a surety bond is guaranteeing can last much longer than that. “If you’re looking at one-year default models and you write a six-year obligation, that may not end up well at all times,” Delisio said.

Construction projects in particular can last a number of years, so bond underwriters often want to have a strong understanding of a contractor’s financials, its business models and the particular project it needs bonded.

“The typical duration of a performance and payment bond is right around 36 to 40 months. It is not uncommon to have five- or six-year duration obligations,” Delisio said. “No one can predict the future, but just a strong understanding of what the business does well, what they don’t do well and where they want to take the business is important.”

Supply Chain and Other Exposures Make Underwriting Surety More Complex

One reason that carriers need to rely on more than credit models when underwriting surety bonds is the unpredictability of today’s exposures.

Supply chain, inflation and labor issues are just a few factors that might affect a firm’s ability to meet the commitments guaranteed by the bond in a timely and cost-effective manner.

Take supply chain issues, for example. In 2020 and 2021, the pandemic and other events led to shortages of large numbers of products. In some cases, businesses couldn’t find any suppliers for a particular resource. Delisio knows of one supplier who couldn’t guarantee when a supply would arrive or how much it would cost when it did.

“There were times in 2020 and 2021 that people just couldn’t get things at any price,” Delisio said.

By understanding a company’s business models, surety partners can ensure that they can support their customers, even through these challenges. Delisio says that BHSI has worked with customers to understand their contingency plans for supply chain issues and other risks in order to keep projects on track.

“There were a lot of discussions. How are they handling their supply chain? How are they handling contingency?” Delisio said.

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Article Written By: Berkshire Hathaway Specialty Insurance

Author: CMR

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