Continued industry profitability combined with decreases in exposure, and revenues have led to a decline in surety reinsurance pricing at the January 1, 2011 renewal. This follows relatively conservative pricing for the past three years, resulting from reinsurer uncertainty about the potential impact of the credit market developments in 2007 and ensuing financial crisis and recession. Reinsurers are modifying their outlooks on the market, which is leading to reductions in pricing because of low underlying losses.
Contract (Construction) Surety
Public construction spending is a key indicator for the contract surety segment, since most publicly funded projects are legally required to be supported by surety bonds. This measure has increased each year from 2002 through 2009. Public construction spending is generally expected to be flat or increase a few points in 2011.
Primary market surety pricing is flat year over year. Historically, it has been stable over long periods of time, and rate changes are not a primary driver of competition for the surety market. Changes in the size of work program or commission paid to brokers tend to be the areas that have the most impact in stimulating competition for writing new business.
It is not possible to identify an overarching position on rate changes in commercial surety due to the diversity of underlying obligations and related industry segments represented. The commercial surety segment has seen increased competition over the past 24 months with the entrance of new primary players. This has led to terms that favor original insureds, including larger lines of credit and reduced security requirements, along with rate decreases of 5 percent to 10 percent in certain pockets for high quality credits.
Outlook for 2011
Expectations are that loss ratios for contract surety will increase slightly in 2011 from their current levels due to an increase in frequency from smaller exposures. Even if loss ratios creep into the low 20s they will still be well below historical averages of closer to 35 percent and will generate strong profits for the industry.
Reinsurance pricing for surety programs has been at elevated levels relative to the underlying experience for the past three years. This has been driven in part by reinsurers’ fear of the economic crisis resulting in industry wide loss activity. Based on actual results for the past three years, reinsurers are revising their market outlooks and corresponding views on pricing levels. As long as results continue in line with the past few years, reinsurance pricing is likely to decline in the coming year.
Surety reinsurance markets were again highly profitable this past year. Most surety reinsurance programs are written on an excess of loss basis, and loss activity has for the most part been retained net by the ceding companies. A small number of surety programs have experienced losses into the excess layers; however, this is not necessarily indicative of a trend toward deteriorating excess of loss results going into 2011.