Commercial surety bonds 'attractive alternative' to LOCs

Commercial surety bonds 'attractive alternative' to LOCs

Commercial surety bonds

Commercial surety in the US is a recipe for success if you understand the intricacies and complexities of the market. The product is booming as an alternative in lieu of traditional letters of credit (LOC) and there’s ripe fruit for the picking.

“The US commercial surety market is experiencing growth that’s faster than the overall insurance market and faster than North American GDP growth. That’s largely due to increased use of the product as an attractive alternative to letters of credit (LOC) and more obliges accepting bonds in lieu of LOCs,” said David Hewitt, US Surety Practice Leader, Marsh.

“In the past few years, there has been lots of concern around interest rates. Many of our clients were looking for alternatives to putting up an LOC,” Hewitt added. “This led to more discussions and education around the product, which has helped it grow in popularity.”

Results in the US commercial surety market have been positive for about 10 years, with an average 20% loss ratio or lower, which has enticed new entrants into the niche market. Pricing has been consistently dropping for at least three years, and the overall market continues to expand despite declining rates.

The US remains an attractive market for global players to enter. Globalization is an increasing trend within US-based surety portfolios. As more firms enter the US and sign contractual documentation, the need for the surety product continues to expand.

“We’re also seeing a lot of increased demand for commercial surety bonds for deals between US companies. Large corporates are using the product more and more, and if they have a good experience with it, the uptake increases,” Hewitt told Insurance Business at RIMS 2018. “I think the product is a really good alternative for any company that uses LOCs today, to help manage some of their risk.

“The universe where LOCs are used is huge and the different types of obligations parties are required to meet are almost too many too count. Many who previously looked to manage their risk through an LOC are finding that surety bonds provide a really good alternative in lieu, which often comes at a cost advantage, leaving borrowing space available for other financial necessities.”

 

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