I have written many articles on the hard covered bond market. To my surprise, many want to know more details about how we got to where we are. Like all industries, the surety bond industry is heavily influenced by the economy. We can all remember the strength of the US economy at the turn of the millennium; business seemed to be flourishing everywhere. In late 2000, the economy began to slow down. The success of any contractor is directly affected by changes in the economy, which is why more contractor businesses began to fail. With the bankruptcy of the contractors’ businesses came a large number of claims. This is not to say that the soft economy was the only cause of the increase in claims, but it was the start of the domino effect.
What actions did the rest of the dominoes set up to trigger the current hard market? In an attempt to generate more premiums, surety companies used very flexible underwriting practices. These flexible underwriting guidelines allowed contractors to be approved for bonuses for which they should not qualify. Bonds not only issued bonds for non-qualifying contractors, they also issued bonds that shouldn’t be issued for even the best contractors. Maintenance bonds that exceeded 5 years were much more common, anything over 3 years is virtually unheard of these days. Simply put, warranties got too hungry for business and wrote what they shouldn’t have and got burned for it.
The surety companies set up the dominoes and the weakening of the economy started the chain reaction of its downfall. What was the result for the bail bond companies? In the past, the surety bond industry will experience losses of around 25%. In 2001, the industry experienced a staggering 82% loss for the year. In 2002, the industry produced $3.7 billion in premiums, yet the industry as a whole showed a 70% loss. The 2002 Insurance Expense Schedule reported that the industry lost more than $2.5 billion between 2000 and 2002. The end result of the losses was AM Best downgrading many surety companies to junk, others simply they had to close their doors permanently. The rest of the bondsmen took note and quickly changed their attitude. Subscribers have reverted to more traditional subscription guidelines and review accounts carefully. The entire industry has become much more cautious about how to use capital. Since then, contractors have seen their unique contract bonus lines and added capacity reduced.
If you’re a contractor and you’re discouraged with your current bail limitations, keep in mind that you’re not alone. Many contractors compare what they have today to what they had a couple of years ago and search for a new agency only to find similar conditions elsewhere. Always keep in mind that every cloud has a silver lining. Bond lines have been reduced, however, the value of a bond has improved due to current conservative underwriting practices; contractors are no longer able to obtain the required bond to enter into contracts for which they are not financially qualified (obviously this is only an advantage for financially healthy contractors).
It’s more important than ever for contractors to have an agent who truly understands warranties. A bail bondsman should be able to give you sound advice to improve your financial situation and help your business grow. A good agent not only issues bonds, but consults with contractors to make changes so surety companies have less risk, thereby increasing bond capacity and lowering premium rates. A contractor must be sure that their agent is knowledgeable enough to help them make the right decisions, which is absolutely necessary in today’s bail bonds market.
