By Sarina Puccio,
VP – Credit, Surety, Political Risk Underwriter
Munich Re America
When I started in the surety reinsurance industry in 2012, coming over from a primary carrier, a lot of new players were entering the reinsurance market. They came in and mainly competed on price. Some of the new entrants neither had a specialized underwriting team nor, in some cases, any expertise at all in surety reinsurance. Partly as a result of these new entrants, reinsurance rates started to decline and continued to do so for the next 5 years. Rates came down even on certain poorly performing programs. Along with rate reductions, terms and conditions also softened. These trends led some industry participants to conclude that this was the new normal for our market. Others have gone so far as to consider our business a commodity, which is a mistake as reinsurers can and do provide significant value to clients: our focus cannot be on price alone.
I believe that we are entering a new phase of the cycle for surety reinsurance as indicated by developments over the past few months. The market was much more stable during the most recent renewal period with the majority of programs renewing on a flat basis. This was especially noteworthy as surety business was not affected by the severe catastrophes of 2017. Reinsurers were particularly disciplined in negotiating loss-affected treaties and with respect to terms and conditions. Furthermore, the number of new entrants slowed down markedly and some reinsurers even pulled back, or at least reduced, their existing shares. Compared to past years, some reinsurers have clearly changed their approach.
Like reinsurers, primary surety carriers are likely to experience significant market developments in the near term, a number of which might include:
- Rebuilding the infrastructure in the U.S. is widely recognized as an absolute necessity and is a very important part of the current Administration’s agenda (Source: https://www.reuters.com/article/us-usa-trump-infrastructure/trump-administrations-infrastructure-plan-taking-shape-idUSKBN1F71BC, January 18th, 2018). Assuming that a large government-backed infrastructure program is implemented, it is extremely likely that there will be a sizeable increase in demand for surety bonds. This would be a big positive for the but also has the potential to bring some significant challenges to the industry:
- Some of the new construction projects will likely be extremely large. What new risks could this bring?
- There is already a lack of skilled workers across the country. If these new projects move forward, then this labor shortage will likely get more severe, increasing the risk to the industry.
- If new bonded projects become available, this could also lead to greater competition within the surety sector. Would new surety players continue to enter the market and further soften terms and conditions?
- Results for primary surety underwriters are still very good, but when the market turns again will the newer management teams be able to adequately address greater claims activity? Due to the excellent surety results over the past 12 years, they have less experience with periods of heightened claims activity.
- Although public-private partnerships (P3) will become increasingly important, many private sector players, including surety writers, have little experience with P3. This highlights that there is still a lot of educational work to do with respect to P3.
These are only a few examples which show very clearly how the whole underwriting process in the surety sector is likely to be impacted in the future. These developments also have a real potential to affect demand for reinsurance as our clients’ future needs will almost certainly change with these developments. That is why reinsurers need to be prepared, proactively focus on the leading indicators in our industry, and seek to provide new tailored solutions as well as superior service to our valued clients. These insights and value-added services are key to a long-term partnership between reinsurers and their clients.