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Should the "green economy" take hold with consumers and local and state governments--in the form of carbon-trading markets that exist in Europe, for example--demand for surety products will rise, a new report found.

In Europe, carbon-trading programs, designed to cut the level of carbon dioxide in the atmosphere, allow governments to issue credits to polluters. Polluters who exceed their credit allocation are penalized. Critics of carbon-trading, implemented as part of the Kyoto Protocol, say it doesn't work because some governments issue too many credits to polluters.

"Whenever there's an obligation, or a contract or something that you've got to fulfill, where there's a chance you may not be able to fulfill it, that's a perfect place for surety," says Mark Jablonowski, principal author of "The Surety Market: Taking Care of Business 2007," by Conning Research & Consulting Inc.

Construction companies and developers are a prime source of demand for surety bonds. They are typically used as a guarantee to a local government that a project will be completed should a developer default.

"Bonds have always been a big part of environmental cleanups; however, in this case we're kind of looking at it proactively and saying, 'OK, not just cleanup, but you've actually got to work on your process to prevent future pollution,' " says Jablonowski.

Whether rising temperatures will generate a groundswell of support for global pollution exchanges, and whether that will in turn become a new source of growth for the surety market, no one knows yet.

But even if pollution exchanges take root, the surety market isn't expected to challenge the indemnity marketplace anytime soon. With about $3.5 billion in written premium annually, the surety market is expected to grow by about 5 percent in 2007 and 4 percent in 2008 to $4.6 billion, says Jablonowski.

By comparison, property/casualty insurers generated $425.7 billion in net written premium in 2005, according to the Insurance Information Institute.

June 1, 2007

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