For the last 15 years, the surety industry has flourished in the soft market. The soft market has allowed for ample competition, innovative submission platforms, higher bonding limits, and increased profits. A hard market, relative to the insurance industry is when there is a high demand for insurance coverage and a reduced supply. Profits are lower and claim payouts are higher and more frequent. This leads to an increase in premium amounts, strict underwriting, less competition, and fewer bonds being written. A soft market exists when there is ample competition among insurance carriers. More competition leads to lower premiums, more lenient underwriting criteria, and more high-risk bonds being written.
Despite an increase of competition and capacity, nationwide recessions, global pandemics, and natural catastrophes and disasters can force the market to transition from a soft to a hard market. Impacts of COVID-19 have thrust the surety industry into a hard market. As the impacts of COVID-19 are felt, the surety industry quickly adapted to allow for more electronically sealed and executed bonds. This adaptation has paired well with most surety brokers and producers having an electronic platform integrated into their business model. As the soft market transitions into a hard market, online platforms with “instant” quotes will become more challenging. Success in the surety producing sector will boil down to pure experience and knowledge of each carrier’s appetites, underwriting criteria, and specific risks attributed to each type of bond. The thinning of competition among surety producers and agents has already begun. What can be done in order to thrive in a hard market?
Surety agents should prepare their contractors for the inevitable hard market. The transition will be less harsh when expectations are properly adjusted. Agents should discuss with their contractors the implications of stricter underwriting criteria, decreased bonding capacities, and higher premium rates. Contractors who are able to identify the scopes of work that are most profitable to them will be able to weather economic hardships. For example, if a contractor who performs mechanical and plumbing work does not have a sheet metal shot, they may elect to pursue more plumbing jobs and new mechanical projects. Having to purchase sheet metal from a supplier would make renovations and projects involving ductwork less profitable.
Commercial and financial guarantee bonds will now require personal and business financials to accompany the applications. Performing a soft pull on a business owner’s credit will no longer suffice for some of the more risky bonds, especially in those industries who have been directly impacted by COVID-19, such as health spas and motor vehicle dealerships. This will create more front end work for insurance agents and surety producers as they must request additional documentation of their clients.
Knowing each surety carrier’s underwriting criteria and appetites will be the advantage in thriving in a hard market. Establishing realistic expectations for underwriting procedures, preparing clients for increased premium rates, and knowing the markets are the keys to excelling in a hard market. It’s time to have those difficult conversations with clients; get to know your surety’s underwriting criteria and prepare for a more in-depth application process.