- Will the Surety Market tighten in 2021?
Will the Surety Market tighten in 2021?
This question has been asked throughout the pandemic and one that has generated similar responses from many markets.
With Global growth of the construction sector forecast at 4% for 2021-23 coupled with increased material costs and delays, spike in claims and a decrease in company solvency margins then inevitably as a result Surety Markets have been tightening for those industries hardest hit by Covid-19.
The market has taken the following steps generally with Tightening of Capacity, Enhanced Indemnities/Collateral, Increased Rates and Increased Due Diligence.
Let’s look at each in turn and how they may affect your next bond application.
Tightening of Capacity.
This simply refers to how much business a company or the markets can write based on how much capital is available. Why does this matter to you? Because it affects the price and ultimately the availability of all Surety Bonds.
As with all surety bonds the Guarantor (Insurance Company) requires the Obligee (the applicant company) to issue some form of indemnity back to the Guarantor. There are various levels of indemnities and collateral a Surety provider will take and these are as follows:
CCI / DCI (Counter Corporate Indemnity / Deed of Counter Indemnity) – The minimum security that any Bond is written upon. This is a document that would be signed by the director to agree that should the bond be called upon; the Surety are within their right to recoup costs.
Multi Party CCI/DCI – When the Company is part of a group of companies or has links due to common directors the Surety may ask for cross company indemnity arrangements, this may be due to the parent company having a stronger financial standing.
Personal Guarantee – Could be required if the company’s assets are not strong enough to support the Bond. This gives the Surety the right to pursue cost recovery against the Directors personal assets should the Bond be called upon.
Cash Collateral -. An amount of the Bond would be held in an Escrow account and used if the Bond is called upon. If not, they are released back upon Expiry of the Bond subject to no claims or pending claims.
Property Charge - In certain circumstances surety providers will accept a charge on a property should it have sufficient equity to support a bond application.
More Stringent Due Diligence
When making an application for any Surety product the Surety provider will carry out checks on your firm to ensure it is a company they are happy to act for as a Guarantor. There is no obligation for a Surety market to provide an offer and they only do so if they are comfortable the applicant is solvent enough and has a good track record of completing similar sized projects on time and in budget. With 2020 being damaging to most contractors’ balance sheet this has resulted in even the strongest solvency margins being reduced and therefore more questions around the companies long term resilience and resources are being questioned. Companies are being asked to provide more detailed background history, supplementary accounting information along with other financial information which pre Covid-19 would not have been needed.
As a direct result of tightening of capacity inevitably this results in markets being more select about which Bonds they choose to right and for who and as the demand is high then Surety providers can be more selective and or apply more stringent Indemnities if they so wish.
How can Surety Bonds and Guarantees help?
At SB&G we deal with a multitude of providers based both in the UK and overseas, as such we are not limited to who we can approach and this enables us to seek the most preferential terms for our clients. Our clients range from the seasoned purchaser to those new to the process, but whoever we assist we make the process simple and easy and can help negotiate and advise on wordings as well as liaising with your employer directly if needed to find suitable solutions to suit both parties. If you require a quote for a bond then please get in touch to see how we can help.
Call now to speak to one of our specialist Bond Brokers – 02476 017646
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