Surety reinsurance pricing declined at the January 1, 2012, reinsurance renewal, largely because industry loss ratios are near historical lows and capacity is sufficient to meet demand. General treaty rates fell 5 percent to 10 percent.
Pricing is flat in the primary construction surety sector, with individual examples of rate competition for specific accounts. Rates are beginning to decline for large construction firms as a result of increased capacity. In commercial surety, prices are decreasing by 5 percent or more. Increased competition is driving the softer market conditions, which is impacting rates, collateral and commission.
Primary carriers have become increasingly interested in surety as evidenced by new entrants in 2011. This trend is expected to continue in 2012. Pricing competition will continue in 2012 as new companies enter the market and existing carriers try to increase their market share.
Industry loss ratios are near historical lows. Surety reinsurers with portfolios comprising mostly smaller construction exposures have seen an uptick in loss ratios. However, most operations continue to produce strong profits. Subject premiums for construction surety in 2011 decreased roughly 5 percent to 10 percent year over year. The decrease is driven by reduced public spending on construction projects.
Per risk excess of loss working layer program pricing fell around 5 percent - more in some instances. High excess layer pricing is also declining, though to a lesser extent. Increases in limits were the most common change to program structures, although structures generally remained the same.
Capacity for surety reinsurance has increased in each of the past three years, with the entrance of at least six new markets. Long-term market players are looking to increase market share, which is adding to the competitive environment.
For proportional treaty, there were limited changes to programs year over year, with financial terms tending to be stable.
Overall, surety industry results on the primary and reinsurance levels have continued to exceed expectations, in light of the challenging economic environment. Disciplined underwriting across most of the industry is the primary reason for this. The trend toward increased competition and capacity will create challenges and test underwriting discipline across the industry.