Paths to growth and trends to watch in surety

Public and private actors are investing heavily in the energy transition, and this will only increase in coming years as we reduce dependence on fossil fuels. Just in the first half of 2023, $25bn was invested in solar energy in the United States alone. There’s a lot of potential for surety providers to grow in this sector and the shifting attitude, from risk aversion to openness to opportunity, attest to this.

Existing surety products, such as performance and payment bonds for projects, meet some of the needs in the energy transition. However, we will also need to integrate new products into our portfolios to meet the multi-year demands of the transition, such as payment guarantees to support Power Purchase Agreements (PPAs), margin call bonds and Letters of Credit (LoCs) replacements that create recurring revenues.

We will also need to adapt underwriting practices to favor these business opportunities. At Allianz Trade we are integrating ESG indicators into our underwriting and business processes, which helps push us towards projects that support the energy transition. Underwriters will also need to keep up with new trends and technologies to transact business in this emerging sector in a profitable way.

Outside the United States, demand guarantees are a growing part of the surety picture. There’s a  difference between surety and demand guarantees: whereas with a surety bond the insurance company  will only pay the beneficiary upon proven contractual default, with a demand guarantee the insurance company needs to pay as soon as the beneficiary presents a certificate attesting to a breach without proof. The surety industry typically requires a higher level of due diligence with demand guarantees to mitigate factors with the beneficiary, country and legal risks and underwrite the transactions profitably. 

Demand guarantees free up liquidity for customers; it’s understandable that when interest rates are high, businesses want to avoid exhausting credit facilities with their banks and paying commitment fees. For surety providers, demand guarantees are appealing because they’re common in many countries and are used in virtually every industry, allowing them to build a diverse customer portfolio. All in all, it’s a win-win for customers and providers alike.

As in every industry, technological innovation is pushing surety providers to refine their offer and service model. If we were to look into a crystal ball, we think Blockchain, with its ability to share information securely and instantaneously, has the potential to transform how surety bonds are issued and support the creation of standardized platforms for insurance companies, banks, beneficiaries and customers.

Automating manual, time-consuming processes, particularly in markets where surety is still analog, has clear benefits for customers' experience. Amongst our own customers, we’ve noticed that larger corporations with complex needs are more likely to continue favoring a tailored approach and personalized contact, whereas SMEs and digital-first companies are likely to be happier with a digital-first solution. With blockchain, we have the potential to go even further in automation.

While the fundamentals of surety remain the same, tectonic shifts are changing products, underwriting practices, and uses. The surety market is dynamic and competitive, and we think being able to respond to the changing needs and expectation of companies, as well as the major trends shaping B2B trade, are key to differentiation and success. At Allianz Trade, our global presence, local expertise with 300 specialists, and AA rating from Standard and Poor’s make us the surety provider of choice for 17,700 customers.