The path forward for e-bonds in North American surety

For over 500 years, analog clocks dominated the time-telling market. Then, in 1883, the first digital clock appeared, becoming standard in homes and on wrists worldwide by the 1970s.

The surety market’s shift from paper bonds to electronic bonds (known as ‘e-bonds’) is going even faster. The first e-bonds were issued in 2016 and in just seven years, large swaths of the European and Asian market have embraced e-bonds. However, the North American market is still resisting, with e-bonds making up less than 2% of market share in the region. 

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? 

E-bonds offer many benefits compared to paper bonds. They can be:

·       Issued and approved instantaneously, eliminating wait times and delays

·       Secured and authenticated using block chain technology

·       Used to streamline bond delivery, removing extra steps and reducing administrative work

·       Used to improve bond form standardization, offering greater consistency across fields

·       Adopted by diverse owners and sureties across multiple markets

Skeptics need only look to the European market to confirm the value of digitization in improving efficiency and streamlining processes. Take banking, for example, where customers successfully and securely receive and sign online statements and loan documents. And insurance is no different. 

Given the scale and fragmentation of the North American market, a middle ground is the answer: This is why we are participating in the development of a non-proprietary open source blockchain system together with multiple surety providers and industry players.

This collective tool doesn’t underwrite; it simply delivers verified bonds. But crucially, it offers output choices to our customers, enabling them to receive bonds in multiple ways, from a string of numbers to a QR code to a printed PDF.

This could go a long way to standardize bond forms (while respecting the requirements of different jurisdictions), reduce fraud, and make a greater range of e-bonds more accessible. And in five years’ time, more and more clients may be choosing to digitize their bonds. 

Allianz Trade is constantly updating its services and offers to ensure clients can navigate unfamiliar territory with confidence. As they say, if you never start, you’ll never get it done – and for clients in North America, we’re bringing our expertise and experience to the surety market. To start the digital transition.