2023 Outlook for Surety and Insurance

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Maintaining awareness of what is happening in the surety and insurance marketplaces is important as we continue looking forward towards success in the industry. From my current vantage point, one looks stable and full of support, while the other is becoming more challenging. Let’s break down how each segment is shaking out in 2023 and discuss how to manage current obstacles.

Here is a quick overview of what I currently see in the surety marketplace: 

  • PPP/government money is all but dried up. Contractors now have to make money on their own. 
  • COVID issues have subsided. Projects are well underway that were delayed as a result of the pandemic. 
  • There is plenty of money to be spent privately for projects. 
  • There has been a bit of a slowdown in the public sector. Federal money has slowed a bit. 
  • Supply chain issues and labor shortages still remain the top obstacles for construction firms.
  • In Utah, construction firms are in the black, which means programs remain constant. There is plenty of work for firms, but questions remain—do the projects make sense and can they get the delivery schedules needed? Do they have the labor force to staff jobs appropriately without jeopardizing quality and maintaining schedules?
  • The biggest threat that remains—can contractors walk away from a bad job?   
  • Surety companies are making money. There is plenty of capacity out there in the industry. This can create great opportunities. However, when there is a market shift, we have seen surety companies exit altogether or no longer support surety needs in leaner times. This is why the partnership with your broker and surety is critical. It’s like that old adage of banks only lending money to organizations that have money. Surety companies are similar, but if that relationship is solid and the surety understands the organization, they are more likely to extend themselves to support the contractor through tougher times. Relationships in this industry are critical. 
  • Mergers and acquisitions remain steady. Insurance/surety companies continue to merge or acquire for growth strategies. 

Here’s a quick overview of what I’m seeing in the insurance marketplace:

  • Insurers and reinsurers across the globe continue to face mounting claims that are compounded with significant dollars paid, both within property and casualty (liability) segments.
  • Hurricanes, wildfires, pandemics, major infrastructure/structural collapses, “ambulance chaser” plaintiff’s attorneys, “nuclear” liability verdicts, and inflation are all contributing to industry hard market.
  • These insurers/reinsurers have no choice but to react with increasing rates, reduced coverage, reduced capacity (less insurance available for purchase), or exiting insuring a segment altogether, which we have seen from several insurers already.
  • Every facet of the insurance property and casualty industry is being affected, from homeowners insurance to builder’s risk (course of construction property insurance), contractor’s general liability to retail store BOP coverage, and auto insurance to home owner’s association coverages.

While some industry segments don’t feel as much pain as others, some are affected greatly. Reduced capacity, in particular, is causing issues in the property market, which essentially means that carriers are often unable to insure higher value structures/projects. If they can, they may only want to insure a small portion of the structure, requiring an insured to either accept the fact that their property is not insured to its proper value, or stack multiple insurers to get to the desired value (if even possible, at higher rates/premiums, of course).

Why is this the case? There are many reasons, but one mountain issue is inflation. In the past, when capacity was more readily available, properties were insured, but the replacement cost when a loss occurred was greatly undervalued. Increasing material prices due to supply chain bottlenecks and increased labor wages were not properly accounted for over the past several years, leaving insurers (and insureds in many cases) left footing the bill for undervalued coverage. Now, everyone is trying to catch up, and the results aren’t pretty for many.

However, the insurance market tends to get creative when faced with challenges, particularly in the excess and surplus lines space. Carriers with freedom of rate and flexibility with their policy forms also tend to have more niche specialty on the industry segments they insure. While the hard market is causing pain now, we’re seeing carriers get serious about responding to their policy holders and focusing on insuring them properly. Now more than ever, insureds need to focus on partnering closely with their brokers, communicating clearly, and purchasing their insurance from a carrier that they have confidence in—who shows the potential to insure them the right way.

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