Commercial surety is a broad group of bonds that are used to secure or guarantee a wide range of obligations between parties. These bonds are used in contractual agreements to guarantee that security and regulatory requirements are met in order to protect against financial risk.
In Canada, the commercial surety industry is “performing well and is growing,” according to Matt Baynton, senior vice president - surety, Trisura Guarantee Insurance Company. Why is the commercial surety market performing well in Canada? It’s partly due to the economy.
According to Bank of Canada data released in September, the Canadian economy remains resilient even as global outlook worsens. The bank announced that third-quarter economic performance was “stronger than anticipated,” with wages picking up and housing markets beginning to rebound. Overall, consumer spending was described as “soft” and business investment dropped off, but the bank described the economy as “operating close to its potential, or speed limit.”
“The main driver of the commercial surety market in Canada is government spending on infrastructure,” Baynton told Insurance Business. “The federal government promised a large amount of infrastructure spending in the previous election, but very little of this spending came to fruition.
“A strong economy should ultimately lead to more government spending, which is good for the surety industry. Conversely, if Canada were to head into a recession, there would likely be an uptick in corporate insolvencies which could lead to surety losses.”
Commercial surety bonds are used to guarantee performance of non-construction related contractual obligations. They differ from contract surety bonds that are used specifically within the construction industry. Typical users of commercial surety include government bodies, federal and/or provincial courts, financial institutions, and private corporations.
Unlike traditional insurance policies, commercial surety bonds are more akin to lines of financial credit that banks extend to clients. They’re tri-party agreements which require a unique underwriting skillset, Baynton explained.
“The underwrite is much more akin to a credit underwrite that a bank would do,” he said. “Ultimately we are trying to determine the financial survivability of an organization and where they will be able to meet the obligations that they are undertaking and that we are bonding.”
Once again, this observation links back to the state of the Canadian economy. If the economy is strong, the parties involved within a commercial surety bond are probably more likely to meet their obligations. They’re also more likely to consider bonds as an alternative financial risk transfer mechanism, hence the growth that Baynton has observed in the market.
He said: “I think more obligees are knowledgeable about bonds than in the past, and they’re more willing to accept bonds as an alternate form of security.”