Contract Surety

How the Contract Surety Industry Functions


It’s tough to come up with an overarching description of the contract surety industry. Like the insurance industry its products so resemble, the industry is cyclical. The industry also has a long tail, meaning that a large number of products sell in small quantities as opposed to a small number of products selling in large quantities. With markets the world over becoming more niche focused, this long tail is probably only going to grow longer.

The contract surety market has not been consistent over time, yo-yoing from one extreme to the other. Let’s look at the mid-1990s to the mid-2000s for a case study.

In the mid-1990s, the industry was “soft,” meaning that there were more potential “sellers” than buyers. That meant that little underwriting was done as it was hard to be picky about which contractors to work with. But with the strong economy of the mid-‘90s, there was sufficient contracting work to go around even for unqualified contractors.

The industry went in the complete opposite direction in the early-2000s. The slowing economy and poor underwriting practices of the previous boom time led to the industry suffering five overall consecutive losing years starting in 2000. Industry loss ratio peaked at 82.5% in 2001. Almost $4 billion was lost over this five-year period.

But then the industry swung back to profitability in 2005. The definition of cyclical.

Like many industries, the contract surety industry tends to overreact to losing years and not be proactive enough in profitable years. These losing years caused many companies to leave the industry and for those remaining to tighten underwriting standards while raising bonding prices. Newer contractors were having a hard time finding any bonding capacity at all while giant contractors couldn’t get find an adequate amount.  With the market turning “hard” after the losing years, there were more buyers than sellers willing to sell to them. There just wasn’t enough product to buy.

By 2006, the market was in a transition from hard to soft as properly capitalized and managed contractors seemed to be able to then purchase sufficient bonding capacity. Surety companies were also more willing to provide bonding capacity to small and emerging contractors.

So where can you purchase enough bonding capacity for your company in 2018? Colonial offers the direct and digital way to obtain bid and performance bonds as well as any other surety bonds. We are the insurance company — which means no agent, no broker, and no middleman. We make it easy to obtain your bond. The steps are easy — get a quote online, fill out your information, satisfy underwriting requirements, and enter your payment method. Print your bond from your office. It’s that simple!