2024 marked another record-breaking year for the surety industry, as premiums rose over 12% compared to the prior year, and total direct written premiums hit another all-time high. These preliminary numbers show the industry is on track to achieve a second consecutive year of record-breaking premium volumes.

Looking forward into 2025 we expect a similar result with government investment driving growth as major funding is directed towards highways, bridges, and public transit systems. However, as the new president settles into office and the swamp undergoes large scale administrative changes, the surety industry can expect a slower than expected start to the year. Likely this slowdown will be corrected, but we may see some losses or tightening in the first few quarters of 2025.   

Key Trends in the Surety Industry

1. Labor Challenges: Once the economy kicks into a higher gear,the demand for surety bonds is expected to rise. However, sureties are closely watching potential labor shortages, in specific sectors. These labor challenges could lead to higher costs and delays, historically resulting in increased claims.
2. Increase Loss Ratios: The industry has seen a steady increase in loss activity over the past few years. The primary driver for losses from contractors remains consistent, such as inflation, supply chain disruptions, higher labor costs, and rising interest rates, all of which contribute to increased risk.
3. Reinsurance Tightening: As losses grow, the surety reinsurance market has been negatively impacted, leading to stricter reinsurance terms. These include higher attachment points, larger retentions, and increased rates, which limit primary surety companies’ underwriting appetites.
4. Increase in Bonding Requirements: There has been a rise in bonding requirements for private projects, especially driven by lenders. Also, with Government initiatives such as the Infrastructure Investment and Jobs Act (IIJA) and Inflation Reduction Act (IRA) still being rolled out, more bonding requirements are expected on the horizon.
5. Surety Relationships: The surety industry, much like construction, thrives on relationships. Increased turnover in underwriting teams, both in the field and at the leadership level, is leading to changes in underwriting appetites. Contractors should focus on strengthening relationships and ensuring knowledge transfer to mitigate these changes.
6. Navigating Risk: During economic slowdowns, owners may try to shift more risk to contractors, both contractually and through more onerous bond requirements. As the cost to address surety defaults continues to rise, many leading sureties are adopting more disciplined project-specific underwriting criteria, especially for high-risk projects.
7. What’s Driving Claims: Financial distress remains the top reason for claims, closely followed by scheduling and manpower issues. Inflationary pressures are worsening financial strain, leading to cash flow problems and an uptick in claim activity.
8. Subcontractor Defaults: Defaults in the subcontractor sector remain a concern, driven by cost escalations, supply chain issues, and labor shortages. The high demand for large electrical packages across various market sectors is exacerbating these problems.

Best Practices for Navigating Today’s Market

1. Contract Review: Carefully review construction contracts before signing to avoid unfair risk transfer, unfavorable payment terms, and restrictive damage clauses that could create issues down the line. Note, many General Contractors and owners may have various contract forms so don’t assume the same terms & conditions apply as did on the prior contract.
2. Project Selection: As projects continue to become larger and larger, it critical to establish a disciplined go/no-go strategy based on capabilities including knowledge of the project owner, pricing risk, subcontractor risk, and the ability to manage increased paperwork, billings, and cash flow.
3. Cash Flow Management: Cash flow remains critical to any contractor’s success. With aging receivables and slow change order approvals, it’s essential to proactively manage cash flow and ensure strong financial health throughout the life of the project. Negotiating payment and retention terms upfront with upstream clients helps set expectations.
4. Prequalification of Subcontractors:  General Contractors should ensure their subcontractors undergo quarterly financial and operational evaluations. Setting both single and aggregate limits for preconstruction teams allows for informed decisions when selecting trade contractors during bidding. The limits should indicate thresholds of when and when not to bond back.
5. Financing Confirmation (private work): Ensure that project financing is confirmed and adequate. Contractors should have the contractual right to verify financing throughout the project and halt work if necessary. This should include contingencies and additional funds for change order work.
6. Surety Partners: Even in a stable market, sureties may limit capacity or decrease appetite for to unknown market risks.  Therefore, working with a professional broker who invests time in nurturing current surety relationships and establishing backup sureties is crucial for long-term stability.

Conclusion

Despite some signs of underwriting deterioration, the surety market remains relatively soft, with ample capacity for high-quality contractors. Consecutive years of profitability have attracted new entrants to the surety market ensuring a competitive landscape which provides flexibility for companies seeking increased bond programs that fit their growing needs.