Surety Outlook 2023
How will the construction industry-- and the Surety market be affected by a recession, the IIJA and other factors? Dave Pesce, Munich Re Specialty’s Head of Surety discusses the 2023 outlook with the Surety Bond Quarterly.
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What should bond producers and their construction clients be doing now to prepare for working in a possible recessionary environment?
Bond producers and their construction clients can begin to prepare for a potential recession by reviewing the past. Both can start by examining how their market was affected in prior recessions, so they can plan and prepare for the next one. Typically, there is a lag in construction slowdowns after a recessionary period begins, giving contractors additional time to be prepared. They can start by creating business plans that address the impacts of a recession under multiple scenarios (i.e., deep recession vs. mild recession). Monitoring the vast amount of predictive data on the economy, the overall construction economy and their local markets should be a part of all producers’ and contractors’ routines to ensure they are properly prepared. Focusing these business plans on the financial and business impacts will be critically important. They should be ready to make difficult decisions—and make them quickly in the event of a worst-case scenario.
What do you think the impacts will be on construction activity once projects funded by the Infrastructure Investment and Jobs Act (IIJA) are in the pipeline?
Looking at the spread of the monies in the IIJA, the majority are being spent in areas that require bonding. However, most of the application and approval processes required to obtain funding by the various entities that will be awarding IIJA-funded projects are not quite ready, with most projected to be available in late 2022 and early 2023. We anticipate that much of the work won’t come until 2024 and later. We do expect an increase in prime contractor bond premiums spread out over time due to funding time frames, with a further increase in the use of subcontractor bonds to mitigate risk.
With $21 billion of this bill set aside for environmental remediation, this offers an opportunity. Only a few markets in the surety industry have the knowledge and expertise to underwrite these bonds. Agents can prepare now by considering placing their clients’ environmental remediation contractors with these markets and prepare for the size and type of work that may become available.
Bonds are readily available in today’s market for everyone from infrequent users to the largest companies.
What do you wish everyone knew about surety bonding in the current environment?
Bonds are readily available in today’s market for everyone from infrequent users to the largest companies. Most surety pundits are not expecting this broad availability to go away any time soon. Utilizing professional bond agents at any level of surety is key.
We are still seeing bond requests from insurance agents without the requisite knowledge to address the underwriting questions and find that applicants quickly become frustrated with the process. This can be avoided by finding a surety specialist.
New entrants into the surety arena can easily search and find resources to assist them in understanding what they need to do to get a bond. For example, the newly improved Contractor Bonding Education and Mentoring Program created by NASBP and SFAA enables applicants to choose a customized path for their surety needs. There are also many resources available through contractor associations, disadvantaged business associations, and local and state programs.
This originally appeared in the Winter Edition of the Surety Bond Quarterly Special Supplement.
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