The surety bond insurance segment has fully recovered from its slump, according to a new study by Conning Research and Consulting Inc.
Stephan Christiansen, director of research at Conning Research & Consulting, said the huge increase in losses during the 2001-2003 period were due not just to claims reported but also to claims developing badly and recoveries and other claims mitigation efforts falling off.
“Yet this turned around in 2004 and 2005, and 2006 shows continued improvement,” he said. “Capacity is returning to the market, but with a renewed appreciation for underwriting discipline.”
That newfound discipline, with attention to automation and technology driving cost control, has prompted a positive forecast for the surety line over the next few years, with premium growing at least as fast as gross domestic product, he added.
The Conning study asserts the surety segment has an impact well beyond its size due to its importance to sectors of the economy relating to construction and regulatory compliance.
The report said that general economic trends bode well for the industry with strong commercial construction growth forecast, with some slowing in the residential sector.
But what the report terms “global economic wild cards”–such as the price of oil, terrorism and the U.S. deficit–could upset this forecast, which sureties should be aware of.
“Closer to home, the surety industry continues to be exposed to market cycle effects, with the potential recurrence of competitor entries and the loosening of underwriter and pricing discipline,” the report said.
Market pricing discipline could also face challenges as financial structures and capital alternatives become more complex.
“Technology provides some assistance, as sophisticated credit scoring and predictive modeling can extend the capabilities of the underwriter and provide a structured environment for decision-making,” the report said.
The market will need to extend capacity limits, and new industries are forming that will require new and innovative forms of surety guaranty. “An interesting example of the latter is the development of the 'green economy' with new projects related to sustainable growth and carbon reduction,” the report said.
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