The global surety market was valued at $18.19 billion in 2023 with surety revenue expected to grow to $27 billion by 2030, according to WTW. The market is experiencing continued growth in the construction sector primarily due to the Infrastructure Investment and Jobs Act (IIJA)—which targets federally owned projects, such as roads, bridges, transit systems and energy infrastructure—injecting over $850 billion in funding into the industry.

Further, federal government legislation such as the Inflation Reduction Act (IRA) and the Chips and Science Act (CHIPS Act)—which directs $280 billion over the next 10 years for research and development—has impacted the surety market by driving demand through increased infrastructure and technology projects.

For surety carriers, this has meant that the continued strong fiscal performance experienced over recent years is expected to continue, according to the National Association of Surety Bond Producers (NASBP) “Surety Industry Survey Summary Report."

“A combination of increased federal outlays and inflation in the construction value chain are the largest drivers of growth in contract surety premiums," says David Gonsalves, CEO at BondExchange. “While legislation is always a risk factor to the growth of surety requirements, the Surety & Fidelity Association of America (SFAA) has done an excellent job of educating lawmakers on both sides of the aisle about the value of surety."

Additionally, further growth is expected due to “a disturbing increase of fraud in the economy, which we believe the surety industry is naturally positioned to combat, potentially increasing bond requirements and therefore surety premium," Gonsalves says. And “on the commercial side, inflation has increased many license bond requirements," all leading to an increase in the demand for bonds.

The soft market for bonds has been underpinned by sufficient reinsurer capacity and new surety company entrants into the market. However, changes are afoot within the market, with some indications that the market is hardening.

“In the past year, carriers have started to see losses in contract surety, likely driven by inflation and a hangover from a stimulus-fueled 2021," Gonsalves says. “The long soft market led to some relaxing of underwriting standards that are just now starting to reflect in loss ratios. We're seeing this dynamic even in the traditionally low-risk small commercial space, such as freight broker bonds."

The realization of losses transferred to reinsurers, especially losses in small and mid-sized surety markets, is having an impact on reinsurer behavior with increased retentions, higher attachment points, and exclusions of certain bond types, according to the NASBP report.

“Reinsurers are demanding higher retentions and, in many cases, lower ceding commissions following increased claims activity," Gonsalves says. “We believe the treaty negotiations in 2024 will have a modest impact on the primary market. However, the capacity outlook could get worse if losses continue to tick up against a backdrop of higher retentions."

What could further slow growth is the time it takes for the market to adapt to technology, like blockchain and artificial intelligence (AI). For the surety market, this includes uploading data directly into AI-enhanced underwriting systems and bonds being issued electronically.

“The surety market has been generally slow to adopt technology with many surety carriers only recently adopting conventional tools like automated underwriting and electronic signatures," Gonsalves says. “For those that have adopted some form of automated underwriting, the technology is generally limited to 'instant-issue' type bonds that require no underwriting or a tertiary review of a credit report."

For the surety industry to continue to grow, it must embrace technology. Implementing technology innovations will “allow for a more seamless application process, better data, fewer change requests and more complete underwriting, leading to lower prices for the consumer," Gonsalves says.

Olivia Overman is IA content editor.