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Surety Insurers Awaiting Recovery

More worried than hopeful, surety insurers are expecting the electoral mood boost investment in public work and thus upturn the business. Meanwhile, they take their bets on rental bonds and work on innovating and digitizing their process.

The surety market is no stranger to reality and, like other companies in the corporate world, is going through great uncertainty. How the economy will recover in a post-pandemic scenario, with the threat of a second wave, is the question that resonates most strongly.
While waiting for the reactivation of public works in the run-up to elections, surety insurers focus on improving customer service for their policyholders through digital tools and on curbing expenses to keep their balance amidst the crisis.
In mid-March President Alberto Fernández announced the execution of 1,000 works throughout the country. This implies an investment of AR$ 556.78 billion, and 833 projects in the process of evaluation and approval, which sheds a light of hope for the surety business.
“The government is sending a message to reactivate the works that were at a standstill and the sector is expectant to see this come true. They are mostly municipal and provincial road works that, though not of a great magnitude, require labor and generate employment”, said Juan Martín Devoto, General Manager of Insur, to NBS Bancos y Seguros.
In the meantime, the market is adjusting to the new scenario where virtuality is key because it has changed the way companies work and the relationship with the customers, added Gustavo Krieger, president of Afianzadora Lationamericana.
“What we are seeing is a general readjustment based on a horizon we don’t know if it will remain as it is now, in a post-pandemic scenario where many elements might return to their original forms and others might become definitive. It is very hard today to build a company under an unchangeable and definitive scheme, because the future scenario is very difficult to figure out”, Krieger said.
Nevertheless, the executive was optimistic about the possibility of progress in the reactivation of public works, although he ruled out a growth in the market where businesses fell between 20% and 30%. “To speak of growth in this context is to be stabilized on a foothold, and this is already quite a lot. Growth should result from public works in the short term, and private investment will appear more slowly. I don’t think we will see its results this year”, he stated.
Despite the crisis and uncertainty context, new companies have entered the industry in recent years, and the market has become more competitive.
“It’s a niche business with more and more players participating. The top ten companies held 67% of market share in 2019, and 64% in 2020. This shows that, even if there is a greater concentration of such companies, new players are taking their share”, explained Gonzalo Córdoba, president of Crédito y Caución.
The executive identifies at least two reasons why the surety business grows year after year. On the one hand, it is a business that arouses interest due to its profitability and thus attracts new players who want to join in.
On the other hand, new retail products, such as rental bonds, result attractive for companies that have a portfolio of individuals who enter the surety insurance business through this product.
When asked about the difficulties to grow during 2020, Córdoba explained that they were able to do so despite the complex context because most of the company’s processes were already digital and they managed to adjust quickly to a new digital business model.
This year they expect the government will be able to leverage the growth they need with public works, although he warned: “I don’t know to what extent they’ll be able to do so, due to merely budgetary issues, because in a pandemic context most resources are aimed to health needs”.
In turn, Martín Moar, ACG director at SURA Argentina, pointed out that the market is cautious in view of the complicated mix the pandemic left behind, the crisis that many industries suffer and the expectations of what the government can actually inject.
In this sense, regarding public works, he added that: “It’s a bit risky to say that this will happen. On the other hand, private investment also seems very complicated in this scenario. We’re on the lookout and waiting, that’s why the industry focused its additional energy on rental bonds, a business that had been avoided years ago.”

Businesses that will drive growth

Every economy in the world fell into crisis due to the pandemic in 2002. The companies that did not collapse managed to stay afloat and with no great expectations of growth.
However, it was a pivotal year which accelerated some processes that were already underway. In this sense, insurers aimed all their efforts to improve services and part of such improvement was in line with digitization.
“Companies today, rather than generating new business alternatives, are working hard on services, on the way to offer products, on improving technology and innovation, and on providing employees with tools to make their work easier”, said Devoto.
According to Krieger, it is difficult to find growth niches at this moment, as the scenario is still confusing. However, he pointed out that rental bonds show great potential.
“Unintentionally, due to the circumstances, we have been getting involved in other businesses such as rental bonds in which we operated to a small degree, because people are demanding it. And the mid- and long-term bet is to continue working so that surety insurance has a stronger role than today”, he pointed out.
In line with his colleague, Córdoba added that apart from the fact that there is greater knowledge about this insurance among the general public, the new lease law offers this bond among other options.
“The law somehow favors us, because it allows us to underwrite retail businesses, something atypical in our business, a traditionally corporate business. Part of the growth may be due to that, and considering this is a critical moment for the economy, this is a significant business that is slowly growing. It’s a process, in a few years we’ll see a stronger growth of these products.”
Additionally, the executive said that, beyond a possible reactivation of public works, there are certain services for which the State requires surety bonds. Along these lines, healthcare businesses are expected in the current context.
“The State consumes an amount of services and supplies, and behind these contracts, there are surety insurances, this is a segment that might continue growing. Last year there were major specific contracts related to healthcare issues and the pandemic”, he stated.
On the other hand, foreign trade, despite not going through its best moment in terms of volume and quantity of operations, could have an upturn depending on what may happen with the dollar.
“This business may grow as it did in previous years, not in the number of operations, but in volume of pesos due the exchange rate”, he added.
According to Moar, there might be an upturn boosted by the pharmaceutical and automotive industries, but the chance of making a difference is tied to construction. “Hopefully it will happen, although we unfortunately depend on other factors such as the pandemic, the agreement with the IMF or any other question, which require the capabilities the government has.”
And he added that while the pandemic brought additional opportunities such as the exceptional supply of certain products, there is no certainty this will keep momentum.
“It isn’t a significant volume. When you look at it in the global context, of all portfolios, of all companies, they do not cover the amounts generated by public works or customs guarantees, but at a time when the industry had dropped 20% or 30%, it helped reverse that trend in the second quarter and generated an additional volume we were not used to”, he said.

Issues of concern to the sector

Inflation is one of the most worrying issues for the sector as it hampers daily operations and prevents future projections. “Inflation and the exchange rate are the wild animals we can’t tame”, said Devoto.
As long as that variable is not under control, the rest of the issues become secondary. “Any adjustment is triggered by inflation. At levels close to 50%, nothing can resist. This is the main difficulty we have, and it does not allow us to make projections even for the next six months”, said Devoto.
In this scenario, his company aims at having revenues above inflation, trying to underpin sales and executing a meticulous expense control. “In this business climate rarified by the pandemic, trying to control expenses and have sales above inflation is a reasonable objective”, he added.
Although, at least in his company, they did not register an increase in loss rate, the crisis demanded follow-up and negotiation efforts where contracts’ terms and conditions were reviewed more frequently.
According to Krieger, collections was one of the greatest concerns. “Collections from sales are at a historical low. Companies are not paying on time, due to fear and the situation in general, and it is there that we should focus our attention.”
In turn, Gonzalo Córdoba stated that the threat of a second wave and the measures that may be taken to curb the situation generate a climate of alarm and uncertainty worldwide.
“There’s a widespread concern over this issue. We can see it in the reinsurers who are worried and have tightened the reinsurance market conditions. They fear for the companies’ health in the wake of the crisis. If this continues, it will bring about negative consequences for the economy and for our business since it is closely linked”, explained Devoto.
The companies’ survival together with the previous economic difficulties the country already had, and which worsened with the pandemic, are variables that generate greater uncertainty, according to Moar. In this sense, collections is another weak pillar in the surety industry that was affected by the situation most of its customers are in.
The executive adds yet another concern to these major issues. On the one hand, there are a number of signals arising from the macro context which should tighten the underwriting conditions. However, the opposite trend is observed due to the amount of offers in the market.
“Both underwriting conditions and commercial conditions are softer. At the end of the day, the result for companies is worse since underwriting is lighter and the loss rate tends to rise due to lower premiums. There are many more operators in the surety market trying to share the same pie which, by the way, has shrunk as a result of the pandemic. This makes us all a bit more aggressive,” he stated.

Highlights

“The government is sending a message to reactivate the works that were at a standstill and the sector is expectant to see this come true. Although they are not of a great magnitude, they require labor and generate employment.” Juan Martín Devoto

“To speak of growth in this context is to be stabilized on a foothold. Growth should result from public works in the short term and private investment will appear more slowly, I don’t think we will see its results this year.” Gustavo Krieger

We’re on the lookout, that’s why the industry focused its additional energy on rental bonds, a business that had been avoided years ago.” Martín Moar

“The lease law somehow favors us, because it allows us to underwrite retail businesses, something atypical in our business, a traditionally corporate business. Part of the growth may be due to that, considering this is a critical moment for the economy.” Gonzalo Córdoba