Canadian Underwriter

A Sure(ty) Thing…

August 4, 2010   by Michael George

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The business was interesting enough–guaranteeing the contractual performance of primarily construction companies and then fixing the problem and paying the shortfall if they failed. Further, the fact that surety involves the pre-qualification of those companies and a continuous evaluation of whether these companies have the capacity, capital and character to live up to their future obligations suggested it was a fascinating and complex business. However, a career in Surety was not necessarily an obvious choice 25 years ago for either a broker or an underwriter.

The devastating recession of the early 1990’s was particularly troublesome for the construction and surety industries alike, in part as governments of the day dramatically cut spending. In fact, at least eight sureties, or one-third of the companies in the market, exited the business over a four-year span. These lean times left several career surety brokers and underwriters scratching their heads about their choice.

Fast-forward some 20 years. Surety industry revenues now exceed $400 million and the Canadian economy has survived one of the most significant global recessions in history. This time around, Canada has fared remarkably well compared to other countries, and both the construction and surety businesses have emerged relatively unscathed to date. Governments at all levels have learned from their past mistakes and have invested heavily in infrastructure stimulus programs to keep people working while at the same time reducing interest rates.

While construction, and therefore surety, results lag the general economy (in other words, the worst may indeed be yet to come), early indications are that this spending tonic was appropriate and effective.

Furthermore, a commitment to infrastructure spending was necessary. In 2007, the Federation of Canadian Municipalities penned a report, Danger Ahead: The Coming Collapse of Canada’s Municipal Infrastructure. The report concluded that Canada had used up about 79% of the total service life of its public infrastructure and that nearly 60% had been in place for more than 40 years. A subsequent McGill University paper suggested Canada was facing a serious infrastructure crisis, with needs for upgrading existing and new infrastructure at over $240 billion. Other estimates suggest this number has now grown further. To put this in perspective, total construction spending in Canada has been approximately $225 billion per year, and annual infrastructure spending is less than 25% of this total.

Surety industry revenues now exceed $400 million and the Canadian economy has survived one of the most significant global recessions in history.

The federal government instituted the Building Canada Fund in 2007 with $33 billion in commitments through 2014 to assist provinces and municipalities meet their growing infrastructure replacement and expansion needs. The early 2009 response to the then-looming recession was a further $12 billion for core public infrastructure in an accelerated process, with these funds having to be expended by March 2011. These commitments are helpful, but far more is required in terms of action and commitment by all levels of government, despite the competing needs of paying for an aging population. Add to this the fact that Canada’s population is growing at a healthy rate, thanks in large part to immigration, coupled with the continued trend towards more people choosing to live in cities, and the stress on infrastructure increases.

A year ago, a common concern in the construction industry was that once the government stimulus spending dried up, would the private sector be there to pick up the slack? In Canada, recent indications are that this may well come to pass, which would bode well for both the construction and surety industries. Of course, the need for infrastructure spending is not going away, and since most of this work is bonded, the combination of both strong public and private construction requirements augurs well for the surety industry in the long run.

Canada’s future does indeed seem to be quite bright. The list of advantages we possess as a collective nation is long and allows us to stack up extremely well against our competition. Construction will be a vital, growing and challenging business in the years ahead. Surety will be too, despite the inroads of some competing products like contractors default insurance. Indeed, the need for the pre-qualification services only surety provides has never been greater.

For a young insurance broker or underwriter considering an area to specialize in, and make a career of, contemplate the opportunities that construction insurance and surety provide. Help contractors build Canada. It’s a sure(ty) thing.

Michael George, co-CEO, Trisura Guarantee

Definition of Contract Surety

Contract Surety is:

  A prequalification process at the bid stage

  •  Performance Bond: guarantees performance of the contract
  •  Labour and Material Payment Bond: guarantees payment of subtrades and suppliers

Primary Uses:

  All levels of government contracts

  •  Most large owners and buyers of construction services
  •  General contractors requiring bonds from their subtrades
  •  Funding requirement by banks
  •  Any owner who wants certainty in terms of contractual performance
  •  Industry guarantees approximately $50 billion to Trisura Guarantee Insurance Company

Canadian Population Growth

Immigrants:      250,000
 Emigrants:          60,000
Net:                  +190,000
Births:                378,000
Deaths:              243,000
Total:                +135,000

  •  Canada growing about 1% per year (325,000 in 2009)

Total Population in Canada:

  2000     31 Million

  •  2010     34 Million
  •  2030 (estimated) 40 Million

Canada’s Infrastructure also aging

  Federation of Canadian Municipalities states that “80% of Canada’s Infrastructure is past its service life”

  •  2007 report was called Danger Ahead: The Coming Collapse of Canada’s Municipal Infrastructure
  •  60% of Canadian Infrastructure is over 40 years old
  •  Poor state adversely affecting foreign investment in Canada

2007 Study Concluded:

  $123 billion needed just to rehabilitate existing stock (Municipal infrastructure deficit)

  •  $250 billion plus (Does not include new infrastructure needed to add capacity and expand the existing systems’ “real number”)
  •  $1.7 and $2 trillion (Total replacement value of all infrastructure in Canada)

Ontario Sewer and Watermain Association

  Estimates that 25% of drinking water in Ontario is pumped into the ground and lost in cracks and breaks in pipes

  •  Costs $700 million – $1 billion annually

Global Population Living in Cities

  1900 13%

  •  Today 50%
  •  2050 70% will live in cities
    Trend increases the need for infrastructure

How do we pay for current and futureinfrastructure commitments and needs?

  •  PPP (Public Private Partnerships)
  •  Sources of capital include Pension Funds (OMERS, Teachers, FTQ) and public and private company investors
  •  “Rent” or “Lease”
  •  Privatize
  •  User Pay Systems “Tolls”

© Copyright 2010 Rogers Publishing Ltd. This article first appeared in the May 2010 edition of Canadian Insurance Top Broker magazine.

This story was originally published by Canadian Insurance Top Broker.