Insurance Marketplace Realities 2024 Spring Update – Surety
May 8, 2024
The U.S. surety industry has begun to experience a modest increase in loss activity. Claim activity is picking up in the commercial surety market; however, losses appear to be remaining low.
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Rate predictions: Surety
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Surety
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Contract surety
The U.S. surety industry has begun to experience a modest increase in loss activity. The Surety and Fidelity Association of America reported 2023 third-quarter results that had an industry direct loss ratio of 21.0%, up from 15.0% in 2022. Surety reinsurance results were more dramatic as they have absorbed higher losses that developed over the past few years. The industry remains profitable and underwriting terms have been stable.
Primary surety companies remain profitable
Reinsurance rate increases will eventually impact business.
Interest rates seem to have peaked.
The economy remains stable, and inflation is cooling.
Strong underwriting teams vital to consistency and success
Executive surety leadership retirements may result in changes in underwriting style.
The depth of experienced underwriting talent remains an issue.
Commercial surety
Surety companies had another profitable year in 2023. Claim activity is picking up in the commercial surety market; however, losses appear to be remaining low. Commercial surety continues to see additional entrants with both direct writers and MGA/Us taking flight in Q1 2024. Traditional appetites continue for most sureties; capacity is readily available for average-to-strong credit clients.
Surety activity should increase in the energy marketplace throughout 2024 with both traditional and renewable energy sources. The need for steady funding for renewable energy production and distribution sources will create a robust market throughout this year.
Renewable energy production relies steadily on federal funding.
Solar installations will continue to outpace and outperform wind assets.
Global instability will keep supply tight and prices elevated for both renewables and traditional energy products. Demand remains strong, causing domestic production of oil and gas to rise.
Technology continues to be a strong driver of the economy in the short term, bringing to the forefront demand for digital infrastructure.
Federal infrastructure dollars have been directed to the digital marketplace.
Digital infrastructure could benefit from greater surety application.
Supply chain challenges and an uncertain political climate will impact pricing and speed of expansion.
Commercial surety growth is coming from many industries, with capacity flowing back into the banking sector, hospitality and leisure showing strong growth, and an impending M&A resurgence are driving increased demand for surety.
Banks are finding renewed surety capacity in a tighter credit market.
Continued economic volatility should increase demand for deposit security.
The commercial real estate sector remains a challenging space for many sureties.
Positive results from hospitality names in 2023 and a similar outlook in 2024 will continue to make this space attractive.
International surety
International surety demand continues to grow as sustained higher interest rates, increase in surety needs by small and medium enterprise (SME) companies, higher demand in emerging countries, and liquidity constraints make surety more economically attractive and accessible than bank guarantees internationally. In addition, strong global construction growth, increasing use of surety bonds in commercial sectors, and higher court surety bond demand will result in increased overall dependance on surety.
Global surety revenues totaled $U.S. 18.2 billion[1] in 2023 (up 5.8% from $U.S. 17.2 billion in 2022), and is forecasted to expand by 5.8% CAGR, totaling $U.S. 27 billion[2] by 2030. While North America remained the market leader by region with 43% of 2023 market share[3], surety revenues market share outside of North America has been steadily increasing since 2019 (53% of 2019 market share[4],[5] to 57% in 2023). Emerging market demand is expected to fuel the growth in the international sector as new markets begin accepting surety solutions (such as India in April 2022), larger infrastructure projects compel governments to increase bonding requirements to mitigate risk (such as in Brazil with Law No. 14,133, which increased the surety bond penal sum from 10% to up to 30% for public projects), and SME recovery continues worldwide. Sustained higher interest rates (up 400bps in advanced economies and 650 bps[6]
in emerging markets since 2021) will also continue to steer usage to surety bonds internationally as bank guarantees become less economically attractive and accessible.
Global construction output grew 3.4% in 2023[7]
buoyed by strong growth in China. Excluding China, global construction output expanded 2%[8] primarily benefitting in an upturn in U.S. construction in the second half of the year. The continued downturn in the residential sector will impede global construction output soon. Residential sector output contracted 4.5% in 2023 and will decline further by 4.6% in 2024[9]
due to sustained high interest rates. We predict that advanced economies will feel the impact more with a 1.2%[10] forecasted retraction in construction output in 2024. This is particularly evident in North America and Europe where residential building permits have plummeted. Emerging economies are expected to grow 2.6%[11] due to expansions in China and India. We also predict that commercial construction will remain slow due to the current economy. Offsetting the difficult residential and commercial sectors, is strong spending in the infrastructure, energy and utilities, and industrial buildings sectors. Governments globally have passed legislation to promote and fund projects in these sectors, including China’s $U.S.137 billion sovereign debt issue in October 2023, the United States’ IIJA, IRA and CHIPS acts, and the EU’s Recovery and Resilience Facility delivering up to EUR385 billion in loans and EUR338 billion in grants to members promoting the green and digital transitions.
Digitization will drive surety growth and remain a major focal point. 73% of surety companies[12] are planning investments in digital and analytical platforms to ensure an improved customer experience. In addition, 68% of surety bond clients[13] have expressed a preference to receiving bonds digitally. As electronic bond demand continues to grow, governments are enacting legislation to ensure principal and obligee safety from acceptance to issuance to recording digital bonds. In addition, industry groups, such as The International Credit Insurance & Surety Association, are also forming working groups to help streamline bond issuances, including the online attorney registration and signature verification process.
Footnotes
“Surety Market: Global Industry Analysis and Forecast (2024 -2030) Trends, Statistics, Dynamics, Segmentation by Bond Type, End-User, and Region”, Maximize Market Research. Return to article undo
“Surety Market to grow at a CAGR of 5.8 percent reaching USD 25.5 Bn over the forecast period,” Maximize Research, April 21, 2023. Return to article undo
“Surety Market: Global Industry Analysis and Forecast (2024 -2030) Trends, Statistics, Dynamics, Segmentation by Bond Type, End-User, and Region”, Maximize Market Research. Return to article undo
“Surety Market: Global Industry Analysis and Forecast (2024 -2030) Trends, Statistics, Dynamics, Segmentation by Bond Type, End-User, and Region”, Maximize Market Research. Return to article undo
“North America Surety Market Forecast to 2027 - COVID-19 Impact and Regional Analysis By Bond Type (Contract Surety Bond, Commercial Surety Bond, Court Surety Bond, and Fidelity Surety Bond); and Country,” Business Market Insights, August 2020. Return to article undo
“Higher-for-Longer Interest Rate Environment is Squeezing More Borrowers,” IMF Blog, Tobias Adrian, October 10, 2023. Return to article undo
“Higher-for-Longer Interest Rate Environment is Squeezing More Borrowers”, IMF Blog, Tobias Adrian, October 10, 2023. Return to article undo
“Global Construction Outlook: Key Trends and Opportunities to 2027”, Global Data, December 2023. Return to article undo
“Global Construction Outlook: Key Trends and Opportunities to 2027”, Global Data, December 2023. Return to article undo
“Global Construction Outlook: Key Trends and Opportunities to 2027”, Global Data, December 2023. Return to article undo
“Global Construction Outlook: Key Trends and Opportunities to 2027”, Global Data, December 2023. Return to article undo
“Surety Market: Global Industry Analysis and Forecast (2024 -2030) Trends, Statistics, Dynamics, Segmentation by Bond Type, End-User, and Region”, Maximize Market Research. Return to article undo
“Surety Market: Global Industry Analysis and Forecast (2024 -2030) Trends, Statistics, Dynamics, Segmentation by Bond Type, End-User, and Region”, Maximize Market Research. Return to article undo
Disclaimer
Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
