The surety industry has been moving slowly toward automation of surety processes for decades but, in most instances, paper bonds with wet signatures have remained the norm and the end result of those processes. Few in the industry would argue that there is not a better way; however, finding that way has been challenging and elusive on a number of fronts. Suddenly, the industry is seeing change. The working conditions necessitated by the COVID-19 pandemic are accelerating the surety industry’s efforts—and the interests of bond stakeholders—to move toward paperless processes and environments, as well as to gain the promise of greater security and efficiencies. Simply put, the “same old, same old” in-person processes could not be done without risk to personal health and safety.

A Problem With Paperless?

The COVID-19 pandemic unfortunately remains an all-too-real presence in daily experiences, which, in turn, has propelled exploration of electronic bonding environments. What seemed to some like the stuff of science fiction five or 10 years ago no longer seems like just a distant and remote possibility; rather, recent developments point to the inevitability of the wholesale digitization of contract surety bonding. There are, however, a tremendous number of steps to take and many obstacles to overcome on that path—chief among them is the hesitation or reticence of some bond obligees, procurement officials and their legal counsels to accept bonds in other than paper formats.

The National Association of Surety Bond Producers and The Surety & Fidelity Association of America recently issued guidelines to help owners, officials and others contemplating development or acceptance of electronic bonding systems. The document, titled “Best Practices: Electronic Bonding Technologies” (found at nasbp.org/ebonding), provides from the standpoint of the surety industry a checklist of important and necessary characteristics of any electronic bonding system, which is defined as “a process which allows for the creation of a surety bond by wholly electronic means, substituting required actions and elements comprising standard methods utilized for bonding with acceptable equivalent digital activities and tools.” Among those characteristics are that the methodology maintains the existing legal relationships and obligations among the parties; ensures the validity and nonrepudiation of the bond; and includes or permits the signature of the surety and principal using either digital signature technology or other proven technologies.

The issuance of this document was a much-needed surety industry pronouncement and a critical step toward educating bond obligees and public officials, and works to frame their conceptions of what characteristics comprise proper electronic bonding methodologies.

The Future of Connectivity

The surety industry, collectively through surety trade associations, individual surety brokers and surety companies, is also exploring the use of blockchain (or distributed ledger technology), the same type of technology behind cybercurrencies, to help facilitate digitization of surety bonding processes, specifically digital creation and execution, in addition to delivery of contract bonds and powers of attorney. This effort, first initiated by The International Credit Insurance & Surety Association, then joined by NASBP, SFAA and other organizations, is under the auspices of The Institutes RiskStream Collaborative, a nonprofit entity that is the insurance industry’s largest enterprise-level blockchain consortium. Blockchain technology offers a means to share data and transaction information between different systems, enhancing transactional efficiency and transparency in a secure, trusted network environment. The surety industry, by the very nature of its product, needs multi-party workflow solutions that can overcome disparate, proprietary systems, providing true data transference. That has been the “holy grail” aspiration, and the advent of blockchain technology, which can allow different proprietary systems to connect with and respond to each other in an environment that offers trust between parties and immutability of the data being shared, is a significant step toward that future.

The RiskStream Collaborative created a series of open workshops for surety industry participants regarding a powers of attorney repository. The lessons learned in those workshops have generated momentum toward building a proof of concept in tandem with producing enthusiasm for exploring blockchain applications for digital bid, performance and payment bonds. The successful development of blockchain technology to facilitate digital bonds and to verify accompanying powers of attorney is viewed by participants as a potentially crucial technology to drive growing acceptance of electronic bonding by public and private obligees.

With the characteristics of acceptable electronic bonding technologies defined and efforts underway to build such technologies, can the acceptance of digital bonds be far behind? The answer to that question in part lies in the interest of surety stakeholders, bond obligees and bond principals alike to demand a better way. If surety stakeholders believe that change is needed and necessary, the case for which being made especially relevant and powerful by the impacts of COVID-19 on our business environment and the world, moving toward a paperless bond world seems a distinct possibility in the near future.