Credit & Surety Pricing and the Effects of Financial Market Convergence

This paper describes how the convergence of the insurance and financial markets is affecting Credit & Surety insurance. It explains why prior experience has become an unreliable measure of exposure and how this paradigm shift affects the pricing of Credit & Surety products. It proposes a new exposure based method for analyzing Credit & Surety that combines the best practices of insurance and financial market pricing theory. Discussions about its implementation as well as sample calculations for, both primary and reinsurance pricing are included. This paper also discusses the new breed of Commercial Surety bonds that have been recently developed to compete with traditional financial products. Finally, the paper addresses the need for better and more sophisticated risk management techniques for the industry.