C+S March 2020 Vol. 6 Issue 3 (web)

Direct Premium Written







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as the forecasts of many economists shift gears to a more cautious outlook.

Default Insurance (SDI) in the market. SDI is an alternate product to bonding and, over the past 5-10 years, has experienced sizeable losses due to poor management of aggregate exposures. However, recent guideline changes and market conditions have given SDI new life, and this has attracted a number of new players to the SDI marketplace. Although margins are good and backlogs are increasing, contractors are still facing a wide range of challenges similar to that we’ve seen over the past few years, including labor shortages, rising material costs and the uncertainty of fiscal and government policy. Even with the small-to-large markets having such strong results in 2018, not all is smooth sailing, notably in the megaproject arena (greater than $250M) where the Surety industry has experienced sizable losses and we’ve seen some significant contractor failures. These large losses may be isolated but, once fully realized, could have a significant impact on the overall construction and Surety industries. This will eventually lead to a correction in these markets. This begs the question, “Are you prepared for the next downturn?” Be Prepared It’s easy for business owners to fall victim to the trap of maintaining the status quo, especially during times of prosperity. Most contractors simply lack the focus or do not see the value in assessing their opera- tional procedures and committing to improving on them until forced by a market shift or project failure. However, “Best in Class” business owners understand that now, dur- ing prosperous times, is the right time to perform an internal audit of their company’s capacities to capitalize on opportunities and guarantee both short- and long-term success. An operational audit should focus

Although continued optimism may be declining for some, the surety and construction industry remains very fruitful. The Surety industry is reporting another record year in direct premium written and overall capacity, and the availably of credit is at an all-time high. Contractors’ backlogs are strong and profit margins appear to show signs of not only stabilization, but also slight increases in some trades. In 2018, The Surety and Fidelity Association of America (SFAA) re- ported overall direct premium written of $6.6 billion, up from $6.2 billion in 2017. The SFAA anticipates similar growth results for 2019 and likely 2020, with relatively low losses across the board. Parallel with the Surety industry’s results, non-residential public con- struction spending remains up nearly 6.4 percent from this time a year ago. With an election year on the horizon, and increasing infrastructure needs, non-residential spending should continue to grow in 2020. The availability of credit is in abundance for both small (under $10 million), medium ($10 - $100 million) and large ($100 - $250 mil- lion) size contractors. Because of the appearance of an endless surplus of work, many contractors are pushing their aggregate programs and continuing to show healthy backlogs going into 2020. The excessive amount of credit in the small-to-large markets has led many surety companies to soften their underwriting guidelines in an effort to obtain additional market share. This has been great for the surety consumer but will likely have a detrimental long-term impact on inevitable future surety industry loss results. Another interesting trend in 2019 is resurgence of Subcontractor


march 2020


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