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Professor V returns to campus to introduce new concepts in the surety business, covering pre-qualification, claim processes, and current issues. Gain insight into the history, classifications, bid process, underwriting, and key distinctions of surety. Explore the industry's expense structure, international presence, and more.
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RMI Intro to Surety plus … “Prof V goes back to Campus…”
Surety • Prof V • CEO Emeritus CNA Surety Corp • Prof Emeritus UIUC Finance • EVP Surety Arch Insurance Group
Surety • Will introduce some new concepts to you • Overview of surety business… • Pre-qualification process… • Compare to Insurance & Banking.. • Overview of claim process… • Current issues…
Surety • What is surety ? • Ancient process • Biblical commentary • Babylonian • Roman times • English history • U.S. history
Surety • Personal surety • Legal development • Common law v statute • Statute of frauds • Development of corporate surety
Surety • Essence of the surety relationship • Three party arrangement • Surety guarantees the obligation of a primary obligor (principal) to a third party (the obligee) • Surety -- Principal -- Obligee
Surety • Industry highlights • $ 5 billion annual business -approximately 1% of p/c revenues • 135 or so groups of companies write bonds in the USA • Multi-line and specialty companies • Top ten write approx. 70% of business
Surety • Bonds support both public and private transactions • Bonds are typically statutory in nature • 85 to 90% of contract industry premium relates to public works projects • 99% plus of commercial premium relates to statutory obligations
Surety • Classifications of bonds • Contract • Commercial
Surety • Contract • Bid • Performance • Payment
Surety • The bid process • Discussion • Underwriting/pre-qualification process • The three Cs of Credit extension • Character-Capacity-Capital/Credit • An expensive and in-depth process
Surety • Character • Too often a given, but essential • Stature in community/reputation • Relationship with other business partners • Experience says watch out if an underwriter is aware of character issues
Surety • Capacity • Proven track record on similar size,scope and location of work • Organization • Comprehensive business plan • Performance record plus the ability to meet obligations on current and future work load, bonded and un-bonded • Continuity plan
Surety • Capital • CPA certified audited f/s for three to five years • Work in process (WIP) for bonded and un bonded work • Investment strategy • Affiliated businesses • Perform complete analysis • Trends over time in profitability,liquidity and leverage • Credit history • Bank relationships • Accounting system/cost control system • CFO/financial staff • Reputation of CPA performing audits and other services
Surety • Commercial • Fiduciary • License and permit • Court • Public official • Miscellaneous • Fidelity
Surety • Some key distinctions … Surety and Insurance • Two party (insurance) v three party (surety) • Principal (insured) is not directly protected by bond • Third parties receive benefit • Law of large numbers does not apply • Loss expectation v no loss anticipated • Principal is always primarily responsible for completion of the obligation • Surety obligations are generally non- cancelable • Premium non-payment not a reason for cancelation
Surety • Surety and banking • Surety like banking is an extension of credit; monetary v non-monetary obligations • Analysis of business very similar • Repayment of credit or obligation • Banks and sureties expect repayment • Banks and sureties do not expect a loss • Rights to pursue defaulting principal • Collateral • Indemnity
Surety • Claims process • Number of alternatives • Surety’s responsibilities • Fulfill the commitments to various stakeholders • Performance • Payment • Other
Surety • Industry issues • Surety has cycles too… • Hard and soft markets impact surety • Regional and national economic impact • High profile cases/issues • Enron and others • Sub prime • Capacity on major accounts • Large and mega contracts… • Fortune 1000 exposures…
Surety • Industry issues • Expense structure • Acquisition • Underwriting • Reinsurance • Capacity • Pricing • Legacy issues • Alternative products • Insurance v surety • Pricing of surety • Commercial exposures create real pricing issues • Rating plans are antiquated
Surety • International • U.S. v Guarantee market throughout the world • The European Union • Other surety expansion • Critical issues on business practice • Cultural differences • Finding the right partners
Surety • Why did the Prof go back to business….
Surety • Final thoughts…. Mark Vonnahme EVP, Surety Arch Insurance Group Mvonnahme@archinsurance.com 215-606-1701