The North American surety market is large, representing 50% of the global demand and $8-9 billion in gross premiums annually. This is driven by two factors: first, that bonds are mandated, not optional. And second, that bonds issued typically run at 100% of the obligation, versus around 20% in the rest of the world.
The bonds market is also, however, highly fragmented. Unlike with traditional trade credit insurance, where the insurance policy is essentially written by the provider, local governments and beneficiaries dictate surety bond forms. And these forms – the legal document stating the purpose, penalty and terms and conditions of the bond – can vary dramatically from state to state. The result? Over 25,000 individual bond forms in North America alone.
Not only does this make it difficult to standardize across regions, but it can have real-world consequences. Let’s say you are managing an interstate highway construction project. Both jurisdictions could require different surety forms and, in extreme cases, may hire separate contractors to complete the project. You know, when you cross from Maryland to Delaware, the color of the asphalt changes from black to gray – there’s a defined line!
The inconsistency extends to providers and clients, too. For example, a surety provider operating in Iowa can’t write bonds in New York without getting that state’s approval. And a client in Iowa may only have one bonded project every five years, whereas a beneficiary in New York might need bonds seven days a week. For players in low-volume, low-demand areas, one key question may arise: why should we transition to e-bonds?