The surety bond market is set to receive a significant boost from inflation and the sharp influx in infrastructure projects, driven by the government’s $1.2 trillion infrastructure spending bill.
That’s according to Aaron Steffey (pictured), CEO and co-founder of Propeller Bonds, an insurtech managing general agent (MGA) specializing in surety bonds.
“A contract surety bond that was a $500,000 job three years ago is now a million-dollar job with inflation. Surety benefits from that because inflation is driving up the total bond value,” Steffey said.
“The second thing that’s changing the surety market is the infrastructure bill that passed at the tail-end of COVID. The $1.2 trillion infrastructure spend is largely going to be on bonded projects.”
President Joe Biden unveiled a historic $1.2 trillion infrastructure package in 2021. The package includes roughly $550 billion in new investments for bridges, airports, waterways, and public transit across the US.
“The infrastructure spending combined with inflation has propelled the surety market. Those two factors, combined with the industry’s better reception to digitization, has made surety an awesome place to be,” Steffey told Insurance Business.
“I think there's a lot of carriers looking to get into surety now at a time when underwriting profits are hurting in other lines of business.
“Surety is a safety valve for carriers because it’s very profitable. But when underwriting profits are flush, surety is a little more on the backburner. We've noticed a lot of interest from reinsurers and carriers looking to get into surety in general.”
One reason for the rising carrier interest in the surety business is its relatively good spread of risk, Steffey explained.
“Our loss ratio is less than 2%. But also, within surety we have a great spread of risk, where it's coming from every different geography, every different type of agency, every different type of bond customer,” the CEO said.
“On any given day, we may sell an auctioneer bond in Minnesota, a contractor license bond in Florida, and then an oil and gas bond in Oklahoma.”
Propeller, a Philadelphia-based insurtech, offers automated, end-to-end underwriting through its platform, aiming to solve common pain points in the surety bond issuance process.
The white-labelled agent platform supports nearly all commercial and fidelity products, including license and permit bonds and ERISA bonds.
When the company launched in June 2020, at the onset of the pandemic, the surety market was ripe for disruption. For a long time, traditional players in the market had been slow to adopt new technology and digitize their platforms.
“We were seeing how much technology was going into other lines of business, and not into surety,” Steffey said of Propeller’s inception. “The biggest sentiment seemed to be about keeping the train on the tracks. ‘Why reinvent the wheel? Why innovate?’”
Steffey, formerly an independent agent, and co-founder Chris Kolger, saw a gap in innovation in surety as tech start-ups raced to cater to cyber insurance and deliver work-from-home solutions to insurance companies.
“Surety is highly profitable, but highly unchanged by technology over the last several decades,” Steffey said. “It created a good opportunity for us.”
Propeller’s timing turned out to be extremely fortuitous. COVID-19 greatly accelerated the surety market’s digitization and forced players to be more receptive to automation – which the firm was ready to offer.
“In the last three years, we've gone from zero to 3,000 agencies signed up, and we're transacting thousands of bonds every month,” said Steffey.
Amid its broader digitization, the surety bond market has become ready to adapt to some of the mainstream trends in insurance, including embedded insurance.
Recognizing this, Propeller recently launched embedded surety bonds that can be purchased alongside a general liability policy.
“We're starting to work with other MGAs targeting small businesses to bolt on a surety solution for their customers and serve as passive revenue stream,” said Steffey.
Propeller is also focused on upgrading its technology to make life easier for agents and carrier partners, including adding more API integrations, and on growing its agency force.
“One area we're seeing a lot of growth in is our product for large commercial. Working with publicly traded mortgage brokers, we handle the bonds for some large insurance brokers on that. We're handling the bonds for oil and gas accounts, private equity deals, and some specialty accounts,” the CEO said.
“We started out streamlining transactional surety. We've now moved upstream into providing a much more holistic solution for agents and brokers.”
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