Sompo-sponsored Business Insurance Risk Perspective

How to bring certainty to surety risks

By Brian Beggs, ExecutiveVice President, Surety, Sompo International U.S. Insurance

Surety is a relatively small segment within the property and casualty insurance industry, but it's an important form of financial protection that complements insurance solutions. While technically not insurance, surety offers a valuable backstop for financial obligations required by statute or contract.

The Surety obligation takes the form of bonds that provide proof of financial responsibility and guarantee performance for a wide range of needs, from performance and payment, to licenses and permits, probate and court bonds, customs bonds, and other commercial or contract bonds. By transferring the risk of default or inability to perform to a surety company, these bonds mitigate risks for project owners, contractors, subcontractors, lenders and taxpayers.

When people think about industries that use surety bonds, construction usually is the first one that comes to mind. Indeed, the majority of surety premiums in the United States are paid by construction firms such as general contractors and real estate developers. Federal, state and municipal statutes require performance and payment bonds in construction contracts exceeding relatively low dollar thresholds. But surety is a diverse line, and it offers protection to risk owners across many industries, not just construction.

For example, customer sectors that Sompo International's U.S. Insurance Surety business represent include:

  • Oil, gas and renewable energy
  • Financial services
  • Service companies specializing in transportation, waste and security
  • National and international public and private companies
  • National and regional home builders and developers
  • General, trade, environmental and heavy construction contractors and subcontractors 
Sompo International Surety focuses on building a diverse portfolio across business sectors with balanced underwriting and an eye toward managing a sound surety portfolio. This approach ensures sustainable, profitable growth, which keeps the business stable. History shows it's all too easy for some companies to write opportunistically without a long-term plan, which leads to unsustainable risk accumulations and, ultimately, hard choices. That's not a good situation for the surety company or its customers, who need risk partners on which they can depend.

Much of the surety business ebbs and flows along with trends in the global and national economies. For example, when real estate development and housing starts are booming, demand for surety bonds is usually quite high. Conversely, in periods such as the Great Recession in 2008, growth in surety slows down. A balanced approach ensures that economic trends smooth our long-term results.

Picking a surety partner

Risk owners and agents should choose sureties that offer:

Financial strength. The cornerstone of any surety is its ability to provide protection. Insurance companies with strong balance sheets and financial strength ratings not only can offer higher underwriting limits, but they also are financially well positioned to handle claims when they occur. A good sign of financial strength is high underwriting capacity in the Treasury listing of surety bond companies certified to do business with the federal government.

Insight. Experience and expertise are table stakes in successful surety businesses, but the best ones leverage those qualities to deliver insights that help customers mitigate risks and strengthen their businesses.

Teamwork. Surety is a collaborative segment, and because the risks it covers are diverse, a strong team with complementary capabilities is better able to assess its customers' risks and offer solutions. A surety company that strives to hire the best people and enhance its team's capabilities makes for a good partner.

Responsiveness. The pace of business today necessitates prompt responses from sureties. Look for partners that are structured to be — and consistently are — responsive to their customers' needs.

Sustainability. Companies that resemble bottle rockets may look impressive on their way up, but they quickly fizzle out and fall. Instead, risk owners and their advisors should look for sureties that are built to last and offer sustainable growth for the long term.

To learn more about managing surety risks, please visit:

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Brian Beggs is Executive Vice President of Surety for Sompo International's U.S. Insurance division.

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