Surety Bonding Crisis

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			Position  |  Background  |  Issue  |  Impact
	Position:		Federal and State agencies with financial assurance requirements must partner with the mining and surety industries to assist in the restoration of a responsive surety market for mining operations and to develop alternatives to surety to satisfy requirements in the meantime. Programs should be evaluated and reformed to: (1) remove existing impediments that discourage sureties from underwriting regulatory obligations for mining; (2) develop and allow more alternatives to surety to satisfy financial assurance requirements; and, (3) assist the mining industry in bringing additional credit/capacity to the market as primary or secondary support for financial assurance requirements imposed by their regulatory programs.
	Background:		Prior to 2000, the surety industry experienced 10 years of uninterrupted profitability. With the economic downturn in 2000, losses mounted with increased business failures throughout most business sectors. Business failures reached an all-time high in 2000, and in 2001 they were twice the number from the year before. A tightening of credit markets was already underway before the horrific events of 9/11. The events of 9/11 resulted in losses estimated between $60-80 billion for the insurance industry, removing a considerable amount of capital from the market. In 2001, the surety industry (a relatively small segment of the entire insurance industry), reported a $2.5 billion loss, or an 80% loss ratio as compared to a typical loss ratio of about 30%. Many of these losses are attributed to several high-profile bankruptcies such as Enron, Kmart and Global Crossing. Sureties attempt to spread the risk of the obligations they underwrite through reinsurance. Reinsurance companies suffered serious losses as well, and reinsurance support for the market is virtually absent today. Six of the top fifteen surety underwriters have exited the surety market in the last two years, others have announced their intent to withdraw, and several longstanding participants have effectively withdrawn by curtailing their exposures so substantially.
	Issue:		Availability and cost of surety bonds are a function of risk. When a surety company writes a bond, it is extending credit on the basis of its assessment of the bonded entity's (the principal's) financial health and the nature and complexity of the obligation during the term of the bond. As the obligation extends further into the future, that assessment becomes more uncertain which leads to a perceived increase in risk. In short, sureties are hesitant to underwrite obligations that extend, five, ten or fifteen years into the future. Sureties control risk by reducing their exposure. Today, risk management means underwriting only the most benign obligations and for a short duration. The Surety Association of America reports that the loss ratios for mining bonds were well below those for all surety bonds. However, the large amounts of required coverage, the duration of the obligations, and the lack of any reinsurance support has left the mining industry wanting for surety capacity at any price. Sureties indicate the following factors make mining operations a challenging underwriting candidate: Duration of the obligations. Large bonding amounts typically exceed the aggregate capacity sureties will underwrite for a single principal. Complexity of the obligations under applicable regulatory programs. Bonding requirements often include speculative assumptions and costs that artificially inflate the bond amounts. Increasing and changing regulatory requirements and burdens.
	Impact:		Inability to access surety bonds or acceptable alternatives to secure performance of obligations can become a barrier to market entry or continuation of operations due to regulatory programs that require bonds as a condition to obtain permits or other authorizations to operate. When mining companies are forced to curtail existing operations or discontinue plans for new or expanded operations due to the lack of bonding capacity, this in turn poses grave consequences for direct and indirect employment, federal, state and local revenues, and the supply of mineral resources critical to our Nation's economic well-being.