A sinking economy, resulting in cutbacks in construction projects and a tightening of credit, is just one of the looming challenges facing surety and fidelity bond underwriters as their association celebrated its 100th anniversary in Washington last week.

There are critical but longer-term challenges to tackle, such as recruiting young professionals and minorities, as well as educating private and public sector buyers and others who depend on bond insurers about the role and value of the industry.

But with housing construction slowing down considerably, and construction firms having a harder time getting credit in the wake of the subprime mortgage crisis, shrinking opportunities to write business is the most immediate concern, according to Rick Kinnaird, chair of the Surety and Fidelity Association of America.

These factors will translate into less bond business for the surety industry and lower profit margins as rising expenses outpaces any growth in premiums, Mr. Kinnaird added in a speech during SFAA's 100th Anniversary Annual Meeting.

The smaller number of available construction projects will likely lead to more aggressive contractor bidding on projects of all sizes, he said, noting that the number of bidders will depend on the availability of surety and bank credit–no easy task with most lenders tightening terms and availability of loans.

“If our contractors cannot get lines of credit that previously have been available to them, we are going to be writing fewer bonds for them,” said Mr. Kinnaird, who is also the senior executive for surety at the Ohio-based Westfield Insurance Company.

But Mr. Kinnaird did say that positive growth still exists in many nonresidential construction sectors–citing energy, health care, transportation and public safety as examples.

Meanwhile, longer term, the surety business must also continue to make gains in recruiting young and minority workers, according to SFAA's president, Lynn Schubert, who said the association has made strides in reaching out to these groups.

Three years ago, SFAA set up the Surety Foundation, which provides scholarships to women and minority students who are involved in finance or accounting, or other business-type courses, Ms. Schubert told National Underwriter.

The aim, she explained, is “to encourage them to come into the surety business and the surety field as an underwriter, or agent, or wherever they might be comfortable.”

Additionally, the association has established an internship program with INROADS, which helps place qualified minority workers into surety departments at insurance companies.

This year, according to Ms. Schubert, the association's efforts have gone a step further. The Surety Foundation, she said, has traditionally been funded directly from the SFAA association budget, and she described the foundation as a “very small operation.”

But SFAA started a fundraising effort that has, so far, brought in $71,000 for the foundation, “and we're looking at significant contributions from some other insurance company foundations,” Ms. Schubert said.

“That really is something completely unique that we're doing for our 100th anniversary–to try and increase the number of scholarships that we can provide to bring qualified students into the industry and become more diverse,” she added.

The association is also continuing its efforts to educate legislators and those who buy surety and fidelity bonds as to the purpose of these products.

The association is looking to educate those in the public sector, according to Ms. Schubert, “on the value of surety and fidelity bonds. A great deal of surety bonds are sold because the government mandates the product.” She cited construction surety bonds that protect taxpayer dollars on public construction as an example.

Ms. Schubert added that some legislators hear complaints from contractors about not being able to secure a surety bond, and the contractors ask that the requirement for a bond be eliminated. But Ms. Schubert said SFAA tells legislators they should recognize “that not everyone is supposed to get a bond. That's part of the value of the bond–that it provides a prequalification process.”

The bond, she noted, is not an entitlement. “It really stands as a third-party guarantee for the contractor, and our challenge is to make sure people recognize that we are supposed to be prequalifying those contractors and then paying if, in fact, the contractor defaults.”

This need for education extends beyond legislators. Others, such as contractors, Ms. Schubert said, need to understand that “we are not a traditional insurance product, and it is not in the taxpayer's best interest that every contractor be entitled to a surety bond so that they can bid on construction work.”

She noted that this would hurt qualified contractors because they would be made to bid against people who do not really have the capacity to perform the work.

To help educate legislators and the public, Ms. Schubert said SFAA and the National Association of Surety Bond Producers run the Surety Information Office, which provides information at conferences and through educational materials.

SFAA also has a Model Contractor Development Program designed to assist mostly smaller contractors in improving their operations, which will help them obtain surety bonds. SFAA, Ms. Schubert said, will be rolling the program out countrywide. Currently, it is available only in select areas.

Special Reports /

Tough Economy Puts Damper On Construction, Heat On Surety Bonds

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