Primary rates for the surety line have remained stable even as the recession weakened the financial strength of many principals. Over the past three years surety loss ratios have remained low compared to their historical trend. Profitability levels in the surety line along with a competitive environment trying to increase market share have held back potential industry-wide rate increases.
The trend of strong profitability with little adverse loss development from prior years continued in 2009. Although 2009 commercial surety gross written premium will be relatively stable from the prior year, contract surety based on construction bonds will see a significant reduction in gross written premium due to the downturn in construction spending. These trends are estimated to produce a reduction in total gross written premium of roughly 15 percent for 2009. The outlook for 2010 is for relatively flat premium income levels. An increase in loss activity is expected for contractors as they find it more difficult to obtain enough profitable work to keep their operations running.
For sureties with unchanged retentions and limits, reinsurance pricing decreased up to 7 percent compared to the level of subject premium. In some cases reinsurers sought increased retentions while some insureds increased reinsurance limits due to concern about potential exposures. Reinsurance pricing increases for select sureties were driven by loss activity or expanded coverage. 2009 began with stable price levels compared to the prior year despite another banner year of profits and was driven by reinsurers’ concern about the potential for increasing loss ratios. As these expected losses did not materialize in 2009 pricing flexibility may be more prevalent during 2010.
Capacity remains adequate for the majority of surety programs even though reinsurers are being conservative due to the current economic conditions. There were, however, a number of entrances and exits from the market. One reinsurer exited surety mid- year and another significantly reduced its capacity and staff. Offsetting these developments, two new players entered the market, two current reinsurers expanded interest and there remains a possibility that two or more new surety reinsurers will enter the market in 2010. Reinsurers will remain cautious due to expectations of increased loss activity. However, the historically low loss ratios over the past few years may result in reinsurers utilizing large positive balances to improve pricing in 2010.