Since the construction recession in 2009, the industry has had a “difficult streak,” says Tom Kunkel, CEO of Travelers Bond and Financial Products. And for insurance agents who sell surety, that means pricing is not the most important issue impacting the market.

Pricing Trends

According to Jack Anderson, president of Goldleaf Surety, surety rates are essentially fixed. “The sureties have been using the same rates the past 50 years,” he says. “It’s the cost of construction that has increased, which ends up driving up the cost of the bond. If the bond rate is the same, the sureties are charging more premium because the cost of the project went up.”

Why are construction costs up? The cost of materials and labor have all increased over the years, which drives the increased surety premium annually—even though the rates have not changed. “This also drives up the cost of construction for the project owners,” Anderson explains.

As the construction industry continues to recover, that’s unlikely to change anytime soon. “The economic downturn has certainly taken a toll on the business,” Kunkel says. “Budgetary constraints on the federal, state and municipal levels have impacted the amounts of funds available for capital improvements, and in turn, the availability of work for contractors.”

Personal and company credit have also floundered. “The financial condition of the contractor is No. 1—end of story,” Anderson says. “Obviously when the economy was struggling, what happened to a lot of contractors’ personal credit? Chances are it slid. That impacted what bonding they could get.”

As a result, any sign of construction industry recovery has been largely “niche-oriented,” Kunkel says. “The real challenge comes from the fact that we just haven’t seen the broad-based recovery that you really look for, whether it be federal, state or municipal spending.”

But it’s not all bad news. “We are seeing growth in employment, interest rates are still near historic lows and the banks are lending money,” Kunkel explains. “Disciplined contractors are succeeding. The construction economy appears to be bottoming out or even showing some pockets of improvement.”

On the Horizon

In the coming years, expect private spending to become a more popular route for surety clients. While public entities have always required contractors to write bonds in order to protect taxpayers, Anderson says many banks and private owners have started requiring bonding where they haven’t before.

“The private side of the construction business is probably in better shape right now than the public side,” Kunkel adds. While that’s helpful to contractor clients in general, unfortunately for independent insurance agents, “a lot of private work doesn’t require bonds.”

But because government funding has become increasingly difficult to come by, Kunkel adds that agents should keep an eye on public-private partnerships (PPPs)—situations in which the government doesn’t have the money to fund a project, so they seek a private party to obtain financing from financial markets or other investors.

“You’re using private funds and then the concessioner is being reimbursed by the public entity over time,” Kunkel explains. “It’s been a procurement mechanism that’s been in place for a long time in Europe, Canada and even Latin America, but because we’ve always had the money to spend here, it’s never been an issue. Now it is.”

Focus will also increase on limiting subcontractor risk. “It used to be common for the general contractor to put up a bond to the project owner and not require subcontractors to bond back to them—the general contractor took all the risk,” Anderson says. “In the last several years, you’re seeing a lot more instances where the general contractor requires subcontractors to put up their own bond covering their portion.”

What else is next for surety? “Some surety companies might be taking different approaches,” Kunkel says. “Some might be tightening up; some might be very consistent. The losses experienced by certain sureties over the last couple of years may impact how they view the business.”

For tips on how to sell surety in a tough market, keep an eye on IAmagazine.com and upcoming issues of the Markets Pulse e-newsletter.

Jacquelyn Connelly is IA senior editor.