The surety industry has suffered consecutive
years of losses which have adversely affected the construction
community that relies on access to surety credit to participate
on public works projects, and to the public by virtue of reduced
bidders. The negative outlook for improvement has caused a number
of surety companies to withdraw from the market entirely, as have
a number of reinsurance companies. The surety environment will
improve when the surety industry becomes a profitable line of business
again.
The goal of the Surety Connection Project is to develop surety based
risk management tools for construction companies, which in turn allow
surety companies to improve their ability to produce profits, which in
turn translates back to being able to provide better surety programs
to contractor clients. The risk management tools derive from exploiting
access to information, and data sharing, that allows for contractors
and surety companies to be better informed about the risks they assume,
and better informed about the risks they are on.
Data from multiple sources and processed by multiple participants to
a single project, let alone a portfolio of projects, requires a great
deal of cooperation and participation from a great number of different
parties, each with their own constraints and resistance to integration
or exclusive relationships.
By working with public universities, the Surety Connection Project can
advance a cooperative approach because the universities underlying motive
is not profit, market share, nor monopoly but educational experience
for its students and to build relationships with potential employers
of its graduates. While there will be opportunities for participants
to generate income and potential profits, they will do so under open
competition and industry adopted open standards. As participants generate
revenue employing the risk management tools that emanate from the students,
the work product will be available to the industry, with talented graduates
to maintain the development in any number of public and private settings.
In the end the Surety Connection Project will help create the risk management
tools and the people to make the tools function across multiple competitive
platforms, so that contractors can have access to the surety credit they
desire, and the surety industry will provide it because of the profits
that have returned to the surety market.
The Surety Connection Project – The Surety Company
The underlying premise of the Surety Connection Project is that a return
to sustained profitability for the surety industry will result in more
existing surety companies to be willing to provide expanded surety capacity,
and more importantly to provide the justification for new surety risk
capital to enter the market to either provide new or expanded reinsurance
capacity or simply new primary surety companies.
The fundamental problems that the Surety Connection project strives
to address are:
Reducing the costs to administer the front end of the surety program
by employing technology to take advantage of the vast amount of project
information available, yet not efficiently captured by the surety. (Bid
List Connection)
Reducing the “blind” aspect of administering the back end
of the surety program by employing technology to take advantage of the
vast amount of project information available, yet not efficiently captured
by the surety. (Project Status Connection)
Mitigating the loss exposure once information is available by creating
surety products that promote a constructive, cost effective construction
based resolution instead of a legally based one. (Surety Bridge Fund
Connection)
Front End Data - The Development of Public Agency Bid Data
A number of the major surety companies have made significant investments
in computer application systems to assist in the management of data to
help identify statistical risk factors with the intention of improving
their underwriting results by applying better analytical tools. While
the data largely focuses on financial information provided by the contractor,
and project information provided by the surety agent, the maximum benefit
would be derived by having project data in a format that each of the
systems could import and process and that an underwriter could link to
for further information.
With a number of public agencies and third party vendors already providing
project information on the internet this potential clearly exists. Agencies
and vendors that accommodate the ability for a surety to use the data
within their respective systems would help drive the cost of administering
a surety program down. With the adoption of open XML standards this could
be done at little cost, and great return.
To help encourage the use of open standards, and demonstrate how the
data could flow from owner to contractor, from contractor to surety,
and ultimately back to the owner as an electronic bond the Surety Connection
Project will work with students to inform public agencies of the benefits
of providing project information in a downloadable field. The students
will then work with the companies that provide bid management applications
to contractors and surety agents and make sure they are all compatible,
and the surety companies so that the information they seek is available.
The reduction in administrative expense has the added benefit of better
information for risk assessment because the initial information will
contain the link to the project not only for bidding, but for project
management.
Back End – The development of project status monitoring capability
While reducing the costs of administering a surety program may be achieved
by the development of a uniform and open standards based transaction
system real profitability will be restored when losses are reduced. That
necessitates that a surety have better information on their ongoing bonded
obligations, and an early warning system to prevent the escalation of
liability caused by new bonds being issued when timely information about
adverse conditions would have prevented it.
Traditionally surety companies have had to rely on a contractor’s
quarterly financial presentation to assess the progress of bonded obligations,
followed by the paper status inquiry that was mailed to project owners,
and finally the personal phone call to the project owner by the underwriter.
With the development of internet based collaborative sites information
is being shared among project participants along a vertical path.
The ability to share data project data horizontally will provide
the foundation for the surety industry to process the initial bond
request with the necessary data for analysis, but also for monitoring
the project once it has commenced.
For every individual surety company to find and integrate with each
project database would be unwieldy for both the surety company and the
project owner. Instead, much like the credit bureaus do, a data warehousing
facility needs to be established that can aggregate the databases and
provide filtered reporting. By establishing such a facility the industry
will have a cost effective means to find the “needle in a hay stack” they
need, and the project owners will likewise have an effective method to
get the information to multiple surety companies with just one link.
The Surety Connection Project, in cooperation with participating universities,
will develop Project Status Connection as a data warehousing application
that public agencies can share their public data with. In turn each surety
can pull their respective data either in real time dashboard, or an archival
history by project or contractor. While this application will be proprietary,
and owned by North Coast Surety Technologies, the basis of its development
will be along open XML standards that any other firm may compete with.
By creating this initial risk management tool as a public endeavor,
with students that will be entering the workforce every semester, the
goal is to create a foundation so that future providers of the data archiving
and distribution systems will follow the open standards protocol with
data sets that were defined cooperatively among many industry participants.
It is often said that knowledge is power. As the ability of Project
Status Connection grows so too does the ability of the surety to monitor
its bonded obligations. Not only the first tier information on the prime
contract, but the secondary level of subcontractor performance can also
be monitored. Therefore a surety on a major project can not only be aware
of overall performance, but can be expanded to monitor individual subcontractor
situations that may manifest themselves into an eventual problem.
The goal of the project is to foster the flow of data using open standards.
