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Survey Report

Insurance Marketplace Realities 2023 - Surety

December 1, 2022

Despite macro-economic challenges, we expect healthy construction activity and strong surety profitability to prevent hardening of the surety market.
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Rate predictions: Surety
Trend Range
Surety neutral Flat

The threat of a recession, continued volatility in the energy and raw materials markets, inflation, rising interest rates and labor shortages will continue to challenge the U.S. construction industry in 2023.  Continued strong surety profitability, low losses and a strong construction market, however, will ensure ample surety capacity into 2023. 

  • We do not a expect a hardening of the surety market due to healthy U.S. construction output, which is anticipated to grow 4% in 2023 (GlobalData) and continued strong surety profitability, with the industry’s direct loss ratio improving from 22.8% to 17.5% in 2021. (SFAA)
  • Predicted construction growth compares to a 2.4% growth in 2022 and a 1% contraction in 2021.
  • Surety revenues grew 7.7% to $7.43 billion in 2021, compared to $6.9 billion in 2020.
  • Ample surety capacity was bolstered by three new entrants in 2022 hoping to benefit from a profitable industry. Further demonstrating surety confidence is a recent poll conducted by the National Association of Surety Bond Producers (NASBP), in which 96% of surety executives indicated that they had no plans to tighten underwriting in the near term. (Surety Bond Quarterly — Summer 2022)

Huge infrastructure investment by the U.S. government is expected to outweigh the dampening of residential construction resulting from rising interest rates.

  • Construction work will increase as a result of the $1.2 trillion Infrastructure Investment and Jobs Act. Partially offsetting this will be a slowing of residential construction projects as high mortgage interest rates reduce housing construction demand.
  • Rising interest rates will impact residential construction because housing demand drops when home buyers are unable to afford higher mortgage costs. This impact can already be seen: July 2022 housing start figures dropped 9.6% month over month to an annualized rate of 1.446 million units, the lowest since February of 2021 and well below market expectations of 1.54 million. (YCharts)
  • Increased interest rates have helped combat rising inflation, with the U.S. annual inflation rate dropping to 8.5% in July 2022 from a 40+-year high of 9.1% in June and coming in below market forecasts of 8.7%. (Trading Economics) The drop in raw material costs can be seen in lumber prices dropping to $429 per thousand board feet in August 2022, compared to a January 2022 peak of $1,329. (NASDAQ)
  • Easing inflation will improve profitability and cashflow for contractors.
  • The reduction in new housing demand has also helped ease the cost of raw materials and will allow contractors the bandwidth to complete their large backlogs with their existing workforce.
  • Infrastructure construction supported by the Infrastructure Investment and Jobs Act includes several large-scale projects, such as the $12.3 billion Gateway project in New Jersey scheduled to begin in 2023. This project includes phased expansion and renovation of the Amtrak Northeast Corridor (NEC) rail line between Newark and Manhattan.
  • Labor demand remains strong, with reports of 32,000 new construction jobs in July 2022, resulting in total construction jobs of 7.7 million. This represents 0.4% growth month over month and 4% year over year. (U.S. Bureau of Labor Statistics) While labor demand still exceeds labor supply, the cooling residential market will help ease the pressure contractors have been facing from a diminished work force.

Talent retention remains an issue for the industry, as well as the ability to effectively transfer knowledge to the new generation of underwriters in a remote work environment.

  • According to the Surety Bond Quarterly (Summer 2022) report by the NASBP, 87% of polled sureties stated that they were focused on hiring, training and retaining a new generation of underwriters; 48% indicated concern about the effectiveness of knowledge transfer in a remote work environment, and 96% said they will need to hire more seasoned underwriters in 2022.

Disclaimer

Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).

Contacts

Scott Hull
Global Head of Surety, Corporate Risk and Broking

Goly Jafari
Global Head of Surety Strategy and Operations

Jeff Broyles
North America Commercial Surety Leader

Douglas Wheeler
North America Contract Surety Leader

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