Magazine article Risk Management

Changing Times, Emerging Markets

Magazine article Risk Management

Changing Times, Emerging Markets

Article excerpt

It was not long ago when commercial surety accounts--any nonconstruction-related bond obligation, but in practice, any corporation with revenues in excess of $1 billion, as well--were extremely desirable within the surety industry. Underwriters believed that this business should be practically loss-free. Surety markets abandoned this line of business in early 2002, however, after experiencing several high-profile bankruptcies, large-scale scandals and over $1 billion in claims paid. Now, after two years of one the hardest markets in surety history, commercial surety has re-emerged from the depths and encouraging signs are developing. Some bonding companies are once again willing to consider commercial surety, but with limitations.

Chief among these are tougher underwriting standards. Surety underwriters now thoroughly review financial reports and will not just rely on a brand name. They analyze profitability, cash flow, market cap and equity. Sureties track solvency ratings closely and apply much stricter terms and conditions to companies that are not investment grade. Indemnity agreements often include language that triggers collateral requirements if ratings fall below certain levels. Many surety companies have instituted benchmarking standards that compare companies and, based on certain criteria, determine the type and duration of a bond, size of program and rate for which a particular account qualifies.

The desire for many kinds of financial guarantee obligations has diminished entirely for some companies and is limited for others. While all bonds have a financial guarantee aspect, sureties consider any bond obligation that does not have any kind of performance component to be a "pure" financial guarantee. Examples of this are advanced payment bonds, deductible bonds and certain court bonds. When underwriting bonds, sureties review not only bond form language, but the underlying contracts that the bond guarantees as well. Bonding companies now pay close attention to their mix of low-exposure bonds such as performance bonds or license bonds versus high-exposure bonds such as workers compensation and insurance premium payment bonds. As a result, a surety may have significant liability in one industry and thus may create very tough standards for newer business from that particular industry. …

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