Trends in Construction and Surety to Watch for in 2020

Mike Bond
Mike Bond Head of Surety North America

As I was thinking about trends in construction and surety in 2020, the month of January slipped by.  So lesson number one – the future is coming at us quickly, and we have to be thinking not only about tomorrow, but the day after tomorrow.  And the day after that.  Through 2019 and into 2020, there have been a number of developments that are going to impact surety and construction.  Here are just a few that we should be watching for:

Surety Capacity and Claims

The surety industry remains robust.  There appears to be abundant capacity for all segments – small to medium contractors, mega-contractors, commercial surety and international surety. While 2019 saw some smaller players exit the market and one large player has already exited the market in 2020, those have little impact on the overall capacity available. I still argue that just about any company can get a bond – so we can’t hang our hats on surety providing prequalification. But you should pay attention to the surety providing the bond – while the bonds may be the same, the quality of the surety provider is definitely not. 

Claim activity is clearly on the uptick. The latest SFAA numbers showed a two point increase in loss ratio from 2018.  As growth in construction continues and contractors become more stretched, we have seen some contractors – specialty subcontractors in particular – stumble.  Full year 2019 results should show increasing losses for the surety industry and that will most likely continue into 2020.

Hardening in the Construction Insurance Market

We continue to see hardening of the property-casualty insurance market, especially in the construction-related lines such as Builders Risk and Workers Comp.  Increasing rates were a common discussion topic at IRMI in November.  Given the loss ratios in these segments over the past few years, some correction was necessary.  Will increased insurance costs squeeze surety pricing or capital? Difficult to say.  The real question is how insurance pricing will influence the pricing and availability of Subcontractor Default Insurance (SDI).  There has been a fair amount of movement around SDI – as some markets have exited or pulled back and new entrants have come in. SDI continues to be an attractive product for many GCs and that should continue into 2021 and beyond. 

Movement Away from Megaprojects and P3s

Only a few years ago, I thought Public Private Partnerships (P3s) and megaprojects were the future of construction.  And while I still believe that P3s have an important role, the past few years have shown that they are far from the panacea many thought them to be.  Look at the termination of the $1.8 billion P3 at the Denver Airport.  That termination will prove costly for the contractors, the airport authority and the taxpayers.  Such a costly and public debacle overshadows some more notable P3 successes – such as the completion of Eagle P3 Commuter Rail Line – also in Denver.  Also noteworthy is that many of the largest and most sophisticated contractors – Skanska, Granite and Fluor among them – have publically announced they are pulling back from participating in multi-billion dollar megaprojects.  What those contractors have found is that the risks they are exposed to over the long duration of these projects– cost escalation, labor availability, technology and regulatory changes – are nearly impossible to manage effectively.  There may be other contractors willing to step in, but it all comes down to management and allocation of risk under a multi-year contract in a rapidly-changing environment.

Mixed Economic Signals

The construction economy continues to boom.  According to Stephen Sandherr, CEO of AGC, “most contractors expect demand to remain strong and in many cases expand in 2020 despite signs that the overall economy may slow or stall.” The expansion continues in spite of the fact that there has been no comprehensive infrastructure funding coming out of Washington (after years of discussion and bipartisan agreement on the need for infrastructure) and the uncertainty that comes with the upcoming presidential election.  Dan North, Chief Economist for Euler North America, points out that the labor market and the economy are strong right now. But that the labor market is slowing, and giving off warning signals about the future. Dan believes that the odds of a recession are fading, though an overall economic slowdown is likely.

Contractor Capacity

We are in year 11 of the current construction cycle and all indications are this will continue into 2020 and beyond, in spite of some issues in the overall economy. What does this mean for our contractors? I continue to hear from contractors of all sizes that labor is an issue – finding qualified individuals is nearly impossible. This impacts costs, productivity and schedules. Contractors who are already stretched continue to be pushed. They don’t have the manpower to complete their backlog. While conventional wisdom is that surety claims occur when the economy turns.

I believe that this extend period of expansion will create its own problems, as contractors and subcontractors stretch to the breaking point. We are seeing some of that now with the contractors that ran into problems in 2019. This a trend that as surety, we are keeping a close eye on. 

Euler Hermes North America Surety is looking towards the future to identify trends to help our customers, partners and underwriting approach.  As part of a global company focused on credit insurance and surety, we bring unique perspectives and capabilities to the marketplace.  If you are looking for a surety that is forward looking and flexible, contact Euler Hermes North America Surety.