Warranty Bonds from the Perspective of Surety Companies

The recent economic downturn and an unexpected increase in losses have greatly affected the surety industry. Several top underwriters have left the surety market, and a large number of acquisitions and mergers have recently taken place in the industry. Also, many surety companies have changed their underwriting philosophy and raised their underwriting criteria and standards. Consequently, contractors are currently facing a more comprehensive list of questions in the underwriting process, as well as the reluctance of surety companies to increase bonding capacity Hughes 2002 . However, the concerns in the surety industry are not limited only to the recent unexpected losses. Another source of concern is the requirement for long-term warranty bonds by state departments of transportation DOTs on warranted highway projects. Sureties are mostly worried about the risks involved in issuing these long-duration bonds and the additional effort needed in the underwriting process. The ensuing increase in the premium rates and the limited availability of warranty bonds to small contractors are additional matters of concern Hastak et al. 2003 . In view of these observations, this forum provides valuable up-to-date information on warranty bonds from the perspective of surety companies and presents the results of a survey that was conducted for this purpose. Since the analysis is based on responses from surety companies in the United States that have experience with warranty bonds, the study becomes beneficial for industry practitioners and researchers because it can help them understand the opinions, expectations, and recommendations of warranty bond underwriters in the surety market.