Surety: the end of a shrinking trend: future brightens for remaining serf-insured companies

Risk & Insurance, Dec, 2004 by Cyril Tuohy

Self-insured buyers of surety securities, faced with shrinking capacity in the bond market, face a world with fewer insurance options yet are being forced to post more collateral, according to surety market experts.

Some companies are having to post bonds, or letters of credit, of more than four times what they were posting just a few years ago. "Many are having trouble getting bonds at a reasonable price," said Kathleen D. Oliver, director of licensure and quality assurance for the Georgia State Board of Workers' Compensation.

She said her state, in which there are about 330 self-insured companies, has increased security guarantees that must be posted by self-insured companies "by very large amounts."

Bankruptcies of companies like Kmart have forced regulators to ask for higher security guarantees in case a self-insured employer should fail. "It was all of us realizing that we had too many companies without enough security," said Oliver.

At the same time, some states have taken a much harder line and are now more likely to revoke self-insurance privileges if companies run into trouble. In addition, there are fewer insurance companies writing surety bonds compared with five years ago, and there are fewer excess insurance carriers.

To give self-insured employers time to find more money, Georgia has allowed the companies to pay in installments.

"The market has definitely shrunk but I think that in time it will reverse itself as companies come back," said C. William Martin, vice president of surety with Safety National Casualty Corp., a St. Louis-based writer of surety bonds.

"We're being asked to do large increases," Martin also said. "We're being asked to go up. We've been leaned on to write more bonds and it's harder for the self-insured corporations."

The current environment is making life difficult for some buyers of surety bonds.

Take International Truck and Engine Corp., of Warrenville, Ill., for example. The company, which operates in seven states, generates profits some years and losses in other years due to the cyclical nature of its industry.

Having to post more collateral this year is proving a challenge at a time when cash flows are tight, and the firm has been unprofitable over the past several years.

"The effect for us is obvious," said David Taylor, manager of workers' compensation and disability for International Truck and Engine. "Less options, more expense."

He said the key is to show regulators why they should make an exception for his company and cut it some slack.

In the case of International Truck, Taylor said it was important to let regulators know that the company has plenty of cash on hand, that it's capable of paying its claims, that it's a major employer in an economically depressed area, and that the company is attractive when judged by what is likely to happen to it in the future, not by what has happened to the company in the recent past.

The good news is that weaker companies who decided to jump into the self-insurance market a few years ago have now left, as they've been forced to seek insurance from primary carriers or find plans with higher deductibles.

Tom Hebson, a broker with StoneGate Insurance Services Inc., said the shrinking trend in the surety market is over and that the market had entered a period of stability that would eventually reward sound companies.