Surety bonding has some catching up to do when it comes to digitalization, especially in the US. However, the infrastructure is in place, and key players will find that a little investment in time and money will pay rich rewards.
It is widely recognized that digitalization of the surety product is lagging behind and all those involved in the surety process are naturally calling for usable technology that will improve its value proposition. Any technology developments should take into account the capabilities of those working with surety and bonding products to deliver innovative process improvements and their commitment to investing in customer satisfaction.
There is debate over which party should initiate innovation because surety requires at its minimum a three party- -relationship between the customer, the Carrier and the Obligee. Add in commercial and risk distribution partners and there could be a risky situation where each party would expect the other counterparty to take action, leading to no progress at all.
There is progress however. Low premium high volume commercial bonds are more frequently being digitally managed, and customs bonds are digitalized quickly in all countries aiming at developing their international trade through comprehensive customs e-procedures. In countries where the surety and guarantee market has traditionally been dominated by banks, contract bonds straight-through processing is often a commodity, even though beneficiaries of large bonds may still ask for a manual signature on the original of the bond they will hang in their office.
We are accustomed to ‘slow revolution’ when it comes to the digitalization of the financial services industry. There are challenges to face but the foundations for positive change are in place if surety carriers are ready to invest.
The Challenges
Surety bonding is a niche area in both specialty insurance and in the Property and Casualty (P&C) line of business and even for specialist credit insurance providers. On top of that, risks covered by bonding insurance can vary from insuring payments made by customers of a boutique travel agency to insuring proper delivery performance of a solar farm worth hundreds of millions in investment. As a result, the surety operations manager must design journeys which satisfy the needs of retail, wholesale and corporate businesses with limited means which inevitably leads to compromises and a lack of satisfaction all-round.
The surety products structure also involves Obligees who are playing a special role in the digitalization process. It is not in every country that surety is considered a valid alternative to cash collateral and bank guarantees. Even in countries where governments are promoting the acceptance of e-bonds, long habits die hard as Mike Bond, head of Surety North America at Euler Hermes, outlined in a recent article: “It is hard to change an industry in which some Obligees still want to see raised seals and wet signatures on bonds.”
Contractors, who represent the largest customer base of the surety carriers worldwide, are confronted with a digital challenge (at least equivalent to that faced by their financial services providers) and are often offered the choice between banks and insurers which puts pressure on insurers to align on banking digital service offerings. Despite the greater protection offered to customers — and the fact that bank guarantees including risk distribution models towards sureties are more and more common — carriers must demonstrate their ability to cope with efficiency expectations of the construction industry to promote further insurance-backed surety bonds.
Digitize to improve
In a world where disruption has become our daily bread, surety carriers might be seen as a species of endangered animals. In the same way that India has managed to implement a nationwide digital ID program for all its citizens starting from scratch — when Europe is still trying to agree to the concept of digital ID and its compatibility with paper ID — carriers might be disturbed, and found wanting, by digitally native entrants.
However, the underwriting capabilities of the carriers and the on-the-ground knowledge developed by localized distribution models are offering an opportunity for insurers to take advantage of their expertise and of modern technology to become what McKinsey recently called ’digitally reinvented incumbents’.
In the US, where automation is very low compared to the size of the market, remarkable industry initiatives have been developed to define standards and guidelines to help to implement them. One example is the project being led jointly by the Surety and Fidelity Association of America (SFAA) and the National Association of Surety Bond Producers (NASBP) to develop ACORD standards suitable to the surety industry. Carriers and their customers could highly benefit from these standards — and all studies show that using them will negate the necessity to go through tortuous internal discussions that fail to result in a better format than the industry standard. Surety carriers are usually part of a larger insurance group and data collected by surety underwriters could be instrumental in the development of specialized business intelligence to be built on enterprise data lakes. Blockchain is creating an environment that will increase efficiency and lower operating costs in securities management. Meanwhile insurers have strong assets to leverage the project-based surety underwriting approach and play a leading role in private distributed ledger implementations.
Define how to digitize
The ecosystem is in place, and despite the many obstacles the entire industry should work together to take action towards digitalization. Instead of complaining about the difficulty of fully digitalizing the end-to-end surety process, carriers could look individually into implementing digital capabilities for each process they fully control. In the latest issue of the ICISA insider, Azman Noorani, head of surety and trade credit insurance at Swiss re Corporate Solutions, commented: “The industry is on the cusp of a transformation with developments such as blockchain, artificial intelligence and digitalization. All companies need to define what those developments mean for them individually, however, as an industry we should make sure together to be in the pole position to take advantage of this.”
Provided that carriers and industry associations (SFAA, ICISA, PASA/APF, ISA) keep on collaborating, integrating the ecosystem (Berne Union, ICC, etc.) and look into satisfying both retail and corporate customers’ needs, the surety product has significant potential to defend its value-added in a (re-insurance portfolio and to a contractor securities panel.
Article by Thomas Frossard, Surety Bonding Product Owner, Tinubu Square
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