In times of crises, surety bonds can be invaluable in maintaining investment flow, protecting construction contractors and supporting economic development. The Asia-Pacific region, with its rapid growth, could benefit from domestic and global, financially resilient, experienced carriers providing surety products across it. There is a role to play for global reinsurers to support surety carriers in the Asia-Pacific region.

However, regulatory environments are diverse, individual markets have their idiosyncrasies, and a balance is required for insurers and reinsurers to viably operate in the surety space. The existing Asia-Pacific surety market is estimated to be in excess of $2 billion. It is characterised by a broadly benign claim environment, despite underlying insolvency rates increasing due to recent global challenges posed by COVID-19, inflationary pressure and local currencies’ depreciation.

At Liberty Mutual Reinsurance (LM Re), we are committed to the region. We have dedicated underwriting and marketing structures and work to cooperate with local and global players to support their broad development and needs.

A developed market: Eastern Asia-Pacific, a focus on Japan

In the most developed economies of Asia, namely Japan, South Korea and Singapore, surety provision has been historically strong, with well-developed legal frameworks and mature judicial systems enabling the product’s distribution.

The Japanese surety market has proved extremely resilient in the face of multiple challenges, and for decades it has been significantly outperforming global profitability and results.

Japan’s conditional surety market and stable business ecosystem have enabled a low claim environment. The majority of bankruptcy cases are processed under the corporate reorganisation and rehabilitation procedure. This has limited cases of liquidation and, as a result, construction is often continued despite financial difficulties. Claims occur only if the contractor is liquidated and the construction is discontinued, which is infrequent.

South Korea and Singapore have also navigated COVID-19 and subsequent global challenges with a neutral impact on results.

A purely on-demand and unconditional surety market: Australia

In a surety market dominated by bank guarantees, insurers are requested to offer purely on-demand and unconditional products in Australia. Claims activity has been rising despite significant government support schemes for the economy, which led to a reduction in surety capacity provided by the insurance market. This poses challenges to the construction industry as the second largest sector of the nation’s economy.

At LM Re, we would welcome more conditionalities and a certain and standardised recourse and subrogation procedure in the procurement law. As Australia’s work and infrastructure projects are booming, the latter actions could potentially enable more capacity in the surety market and help projects to get completed.

An emerging market: China

Surety was introduced only recently to China as a product. There has been significant growth, reaching a current annual premium of ca. $500 million, which is now in a stabilisation phase. The recent global challenges have not produced noticeable claims activity.

Currently, short-tenor public construction-related products are the mainstay of the surety sector. Surety companies have been diligent and underwriting discipline was maintained throughout, meaning surety claims from the ongoing real estate crisis has been minimal, thus far.

The economies of the future: ASEAN and India

The Association of Southeast Asian Nations (ASEAN) and India also present significant opportunities for surety, particularly given long-term prospects and infrastructure needs, which is a material source of surety business.

In ASEAN, surety products are partially used or not at all—the market is dominated by banks. The legal framework for surety business and the judicial system are still to be tested. In some territories local jurisdictions limit international operators’ participation, but there are instances where this is being revised.

Surety could complement the banks’ offerings and enlarge local capacity. The combination of domestic sureties and international reinsurers could support development and growth.

India has infrastructure needs and is starting to look at surety bonds issued by insurers to support its medium to long-term development; it has also been a bank-dominated market.

The Insurance Regulatory and Development Authority of India has issued new guidelines, allowing insurers to provide surety insurance policies as a substitute for bank guarantees.

However, there are regulatory issues preventing insurers and international reinsurers from entering the market. As in Australia, the main concern is the current framework with the request to offer unconditional bonds. The Ministry of Corporate Affairs is reviewing the resolution process, following concerns raised by insurers.

With the necessary amendments in public procurement law, providing a robust recourse and subrogation procedure, a favourable environment for insurers could emerge, allowing them to participate in this territory and potentially make India a significant surety market.

Insuring growth: opportunities for partnership to grow the regional surety sector

The Asia-Pacific region has developed surety markets as well as significant growth prospects. Domestic carriers can rely on a financially committed and resilient international reinsurance industry to support their efforts if they look to capitalise.

In the right conditions, this could be mutually beneficial. It would ensure security of project completion and capacity across both developed economies in the area and the maturing regional growth powerhouses.

At LM Re, we are keen to discuss how we can support our clients in different countries in the Asia-Pacific region.

Cesare Mollica is senior underwriter, financial risks reinsurance–political risks, credit and surety, at Liberty Mutual Reinsurance. He can be contacted at: cesare.mollica@libertyglobalgroup.com