The contract surety industry faces a complex economic landscape marked by inflation, interest rate fluctuations, and supply chain disruptions. These factors collectively exert pressure on contractors’ financial stability, increasing the likelihood of defaults and claims, and compelling surety companies to reaffirm underwriting discipline and risk management strategies.

Inflation has led to a significant rise in construction costs, encompassing materials, labor, and equipment. For instance, the surge in material prices, such as steel and lumber, has escalated project budgets often beyond initial estimates. Contractors operating under fixed-price contracts find it challenging to absorb these unforeseen costs, which can erode profit margins and strain cash flows. Consequently, the risk of project delays and defaults increases, posing challenges for surety underwriters who must evaluate the heightened financial risks associated with bonding such projects.

The recent uptick in interest rates, a response to inflationary pressures, has increased borrowing costs for contractors. Higher interest expenses can diminish contractors’ net income and affect their debt-servicing capabilities. This financial strain may lead to liquidity issues, making it difficult for contractors to meet project obligations. Surety companies, in turn, face increased exposure to potential claims as the financial health of bonded contractors becomes more precarious.

Global supply chain disruptions caused by geopolitical tensions and the current Administration’s trade policies (or lack thereof) have led to material shortages and delivery delays. These disruptions can halt construction projects, leading to extended timelines and increased costs. Contractors generally face liquidated damages and other penalties for delayed project completion, further impacting their financial stability. For surety providers, these delays translate into prolonged exposure periods and a higher probability of claims. More rigorous project monitoring and contingency planning are therefore imperative.

In light of these economic challenges, surety companies are and should be revisiting underwriting criteria to mitigate risk exposure. A heightened emphasis on evaluating contractors’ financial statements, credit histories, and operational capacities is primary. Closer scrutiny of project specifics, including contract terms and the presence of escalation clauses that can accommodate cost increases run a close second. Financially robust contractors should receive bonding as before but the large pool of smaller operators and those accounts that we perceive “closer to marginal than not”, are going to be more of a challenge to write. Diversifying portfolios, doubling down on predictive analytics to assess contractor risk profiles, and reaffirming close, collaborative relationships with contractors and their surety producers to better monitor project progress should be ‘front and center’ until we perceive a clearer picture of how the current economic picture will evolve. It is also a good opportunity (or excuse) for the surety industry to advocate for contractual provisions that allow for price adjustments in response to market fluctuations.

The confluence of inflation, interest rate volatility, and supply chain disruptions presents significant challenges for contract surety bonding companies. These economic factors increase the risk necessitating a review of underwriting practices and robust risk management strategies. We cannot support contractors if we cannot safeguard our own financial stability.

~ C. Constantin Poindexter, MA, JD, CPCU, AFSB, ASLI, ARe

References

Swiss Re. (2023). Credit and Surety in the Age of Economic Uncertainty. Retrieved from https://www.swissre.com/dam/jcr%3Aa8733009-3099-41fe-a603-2cab5a3a35ae/2023-09-sri-expertise-publication-credit-and-surety.pdf

IRMI. (2023). Surety Outlook and Underwriting Changes in Work-in-Progress. Retrieved from https://www.irmi.com/articles/expert-commentary/surety-outlook-and-underwriting-changes-in-work-in-progress

Wikipedia. (2025). 2021–2023 Global Supply Chain Crisis. Retrieved from https://en.wikipedia.org/wiki/2021%E2%80%932023_global_supply_chain_crisis

EK McConkey. (2024). Surety Outlook 2024 – Preparing for Challenges Ahead?. Retrieved from https://www.ekmcconkey.com/blog/surety-outlook-2024-preparing-for-challenges-ahead/

WTW. (2024). Insurance Marketplace Realities 2025 – Surety. Retrieved from https://www.wtwco.com/en-us/insights/2024/10/insurance-marketplace-realities-2025-surety