Current Economic Effects on Underwriting

Given the current state of the construction industry, there are many people speculating what the future holds for construction workers.  The best place to start for predicting the future is to conduct proper analysis of current day conditions.  The weak economy creates a high risk environment for owners, their contractors and the sureties that bond them.  Surety bonds are truly a credit product, so it is subject to the same volatility seen in banks and other financial institutions.  The current economy has forced many insurance companies to consolidate their surety lines, which ahs lead to stronger sureties using sound underwriting techniques.  Underwriting for surety has three main C’s: Capital, Character and Capacity.  These three C’s are being expanded as underwriters are requiring more detailed information.  For Capital, surety companies will require three years financial statements, full corporate and personal indemnity, adequate working capital and sufficient work in progress.  The contractor’s Character is determined by reputation in the industry, and professional relationships.  These are checked by the surety company through calling references for past projects and suppliers.  The Capacity of the company is determining if the company is strong enough to handle the project.  Underwriters will check for resumes, contingency plans, cash flow plans, and equipment.  This should prepare contractors for how invasive getting surety credit can be, which is why it is vital to choose a surety company that is trustworthy and responsible.  All of this leads underwriters to offer some advice to contractors:

1. Know rights and responsibilities
2. Stay within capacity
3. Manage growth and over head
4. Learn why contractors fail