Despite careful underwriting, economic pressure on contractors is leading to mounting losses. According to the Surety and Fidelity Association of America (SFAA), Surety losses have more than doubled this year compared to the previous year, increasing from $300 million in the second quarter of 2011 to $618 million in the second quarter of 2012.
“We would expect loss ratios to continue to trend upward and get to the money-losing threshold of 30- to 40-percent loss ratio by the end of the year,” says Geoffrey Heekin, managing director of Aon Risk Solutions' Construction Services Group.
The fact that losses are growing doesn't surprise Gary Rispoli, Chubb's U.S. Surety field operations officer. “Today, firms are very hungry for work. Starting a project as a contractor takes cash flow, but they don't have a backlog of work to create that cash flow,” he says. “In turn, that leads to greater risk of default.”
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