Surety Bonds: The Wave of the Future
The surety marketplace, like most markets, goes through cycles of growth as well as contraction. The Enron collapse along with a few other high profile bankruptcies in 2001 had a severe impact on commercial surety companies due to large losses. This led to a major pull back in capacity as well as an increase in rates across the board due to increased reinsurance costs.
Fast forward to present day (and for the past several years) and you'll find commercial surety results have been very strong. This has led to new entrants in the commercial surety marketplace as well as increased capacity commitments from established markets. Due to the increase in the number of players and the overall available capacity in the market place, there has been downward pressure on rates.
Now is a good time for company CFOs, Treasurers and Risk Managers to get together and examine what securities they have outstanding, and whether or not it makes sense to look to surety bonds as an alternative security to cash/CDs/ILOCs that are currently outstanding for various obligations. What wasn't available in the marketplace a couple of years ago just might be today.
Areas that companies should look at possibly replacing other forms of collateral with surety bonds:
- Utilities - Many utility companies across the U.S. require commercial accounts to post a security deposit in the amount of an average three month period of usage to guarantee they will pay their bills. Typically the security deposit can be in the form of cash, ILOC or surety bond. If companies are currently using cash or ILOCs as security, now is the perfect time to explore the surety bond option and free up cash and/or your bank line.
- Self-Insured Risk - Companies that self-insure their workers compensation insurance are required by most states to post security to guarantee they will be able to pay these obligations as long as required. Many states will accept either surety bonds or ILOCs. Some surety companies now are willing to write stand-alone work comp bonds as opposed to before when there was no appetite for this type of program. Certain states are easier to obtain standalone bonds in than others depending upon the tail liability exposure in the regulations.
- Insurance Deductibles - When corporations retain large deductibles on their insurance programs, the carriers will often require Letters of Credit to guarantee that the insured can pay the deductible. Traditionally, the insurance companys bond form is extremely onerous and this type of bond was no longer being written. That has changed as some markets are willing to write them for the right credit and for only certain carriers.
- Lease Payments - Companies that lease large blocks of space can be required by a building owner to post collateral to guarantee that they will be able to pay their leases. Surety companies will entertain writing these obligations again however the owner must be willing to accept an annual renewable bond form vs. a bond to cover an entire multi-year lease.
Not all companies are active surety users so they may not have their finger on the pulse of the current marketplace. These are just a few areas that companies should look at to see if they are utilizing the best available option for their company when it comes to guaranteeing obligations. Now is the time to pick up the phone and call Assurance to discuss your options.
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