The Future: Challenges & Opportunities
As the Surety Association of Canada approaches its 25th anniversary in 2017, the pride we take in our accomplishments to date is tempered by the magnitude of the daunting challenges that confront both our association and industry. Indeed it’s been suggested that both the surety and construction worlds are in the midst of a seismic shift that will compel us to re-evaluate every aspect of our business.
The challenges are many and diverse and our ability to meet them may well determine the fate of suretyship in Canada.
The unprecedented string of growth and positive results that began in the mid 90’s came to an abrupt halt as we began the second decade of the 21st century. In 2011 and 2012, year over year premium writings decreased following 15 years of steady growth. In 2013 the surety industry posted a direct loss ratio of 53%; marking the first year of unprofitable results since 1995.
A number of factors contributed to this decline including overly aggressive underwriting and restrictions on public spending; particularly at the federal level, leading to longer bidders’ lists and tighter margins. However, with the industry procurement and delivery practices undergoing radical changes that impact the use of performance security (see below), it will remain to be seen whether this downturn represents a short term blip, or is a harbinger of tougher times ahead.
Personnel / Work Force
Like most industries, surety faces the ongoing dilemma of obtaining and maintaining qualified staff and potential management. With the pending retirement of senior people from the baby boom generation, employers in every sector of the economy face the prospect of a wealth of experience and knowledge leaving the work force over a relatively short period.
It is imperative for that our industry work diligently to attract qualified young people into our business and provide them with sufficient challenges and advancement opportunities to keep them.
Keeping Product and Process Current and Relevant
This is an ongoing issue that has bedevilled the surety industry almost from its inception. Surety bonds continue to be perceived as unresponsive; or certainly insufficiently responsive to the needs of owners and other claimants. However, the hard truth from the perspective of our industry is that this is not simply a perception.
The nature of the product itself does not lend itself to quick turnaround response that is typically demanded by construction buyers. Competitive products like Subcontractor Default Insurance (SDI) and Letters of Credit (LOC’s) have managed to obtain traction because they are (or are perceived to be) more responsive to the needs of end users.
The introduction of the SAC Performance Bond was an effective and long overdue step in the right direction but it is essential that our industry keep its collective ear to the ground and remain prepared to offer out-of-the-box solutions that ensure that our products and performance are responsive to the needs of the industry we serve.
The Paradigm Shift in the Non-Residential Construction Sector
This development has been evolving since the mid 2000’s and will have profound consequences for our industry as its evolution continues over the next several years. In a 2013 interview, Ellis-Don President Geoff Smith observed that over the last five to ten years, the trend has been toward projects that are larger, longer and more complex; a development that favours large multi-national contractors and works against small and mid-size contracting firms.
Governments and public agencies have embraced alternative methods of construction procurement and delivery; most notably the Public Private Partnership (P3). Under this approach the government will typically engage the services of a project consortium made up of private sector entities with a mandate design, construct, finance and possibly operate the project.
This approach has game changing consequences for providers of risk management solutions like the surety industry. Under the traditional Design-Bid-Build model, the project owner (typically the government body itself) is the driving force and decision maker as to the nature and amount of contract security to be provided. Under the P3 model, the roles of the parties to the construction transaction have changed and it is now the private consortium and particularly the construction lender or equity provider that drives decisions on contract security.
The needs and objectives of these private consortia can be vastly different from their public sector partners. The standard surety products and approaches were created to respond to the traditional methods of construction procurement and the challenge for our industry will be to adapt to the new paradigm with updated products and solutions.
The good news in all this is that all of these challenges, while difficult and even daunting, are surmountable. The surety product is sound and responsive to the risk management issues of the non-residential construction industry. Bonds are also the security of choice for the vast majority of public sector projects. There is every reason to believe that with some creative thinking and entrepreneurial actions, our industry will continue to thrive and prosper.
Read More About SAC's Evolution