Growth of bond insurance

The rise in infrastructure investment, both public and private; the growing need to secure major construction projects, particularly in energy and transportation; the increasing use of public-private partnerships; and legislative reforms are among the factors driving the bond market.

Growth factors in bond insurance

• Infrastructure development

The massive expansion of infrastructure has significantly boosted the growth of bond insurance. This type of insurance is widely used to secure major construction projects, particularly in the energy, transportation, public works, and housing sectors.

• Enhanced financial security

Surety bonds enable companies to maintain their solvency and their ability to honor their obligations, ensuring enhanced financial security for the various contracting parties, particularly in the context of Public-Private Partnerships (PPPs).

• Expansion of the private sector

Private companies are increasingly participating in public procurement as well as major private projects, whether in construction, energy, telecommunications, or industrial infrastructure.

• Markets’ globalization

With globalization and the development of cross-border projects, companies are often required to provide surety bonds that comply with international standards.

• Increasing business complexity

Today, transactions are becoming increasingly complex, involving public-private partnerships, concessions, and turnkey (EPC) contracts, which entails the use of surety bond mechanisms.

• Digitalization and innovation

Technological advancements and digital transformation are reshaping the market. The adoption of artificial intelligence, the integration of advanced data analytics, and the development of digital platforms have optimized underwriting and claims management procedures for surety bonds.

Insurers, on their part, offer tailored, flexible products adapted to local and international markets, thereby contributing to the development of this sector.

All these innovations make it possible to:

- improve customer experience,
- facilitate access to bond insurance products, particularly for SMEs,
- accelerate market growth by reducing administrative costs,
- enhance transparency,
- expand the reach of bond insurance products to underserved markets.

• Regulatory requirements

The development of bond insurance remains closely linked to changes in each country’s specific regulatory frameworks. This mechanism is particularly dynamic in many jurisdictions where the law mandates or encourages recourse to financial guarantees to secure contractual commitments.

Strict rules therefore require the use of surety bonds for bidding on public tenders and the performance of certain commercial activities. This is particularly the case in the United States and Italy, where regulations provide for frequent use of surety bonds, primarily in public procurement and high-risk economic activities.

However, there is significant variation in practices and legal frameworks worldwide, requiring insurers to constantly adapt.

Examples of legislation in force

In Europe, the Court of Justice of the European Union (CJEU) permits contracting authorities to require bidders to provide performance bonds as a selection criterion.

In the United States, the “Miller Act,” enacted in 1935, requires two contractual bonds for any federal construction project exceeding 150 000 USD: a performance bond guaranteeing the completion of the project and a surety bond for the payment of subcontractors.

In India, to ensure the proper performance of a public contract, Rule 171 of the General Financial Rules (GFR) of 2017 requires the successful bidder to provide a performance bond, typically in an amount ranging from 3% to 10% of the contract value.

In South Africa, the “Standard for Uniformity in Engineering and Construction Works Contracts,” published by the Construction Industry Development Board (CIDB), governs guarantees for public engineering and construction contracts.

In Cameroon, Decree No. 2004/275 of 24 September 2004, establishing the Public Procurement Code, provides for several types of guarantees for public contracts, notably the final bond (2% to 5% of the initial contract amount), ensuring full performance of the services, and the retention bond (up to 10% of the amount) relating to proper performance and the recovery of amounts due.

In Saudi Arabia, the “Government Tenders and Procurement Law” enacted in 2019 requires a bid bond of 1% to 2% of the bid value and a performance bond generally ranging from 5% to 10% of the contract amount for public projects, with strict obligations for bidders under penalty of bid rejection.