February 2018

The state’s budding cannabis industry gets a push in the right direction via a new surety bond issuance. The cannabis industry continues to struggle for recognition in the U.S., even as more enlightened policies in Canada have tilted the competitive advantage in that country’s favor. But a new surety bond approval from the California Department of Insurance is giving the state’s cannabis industry a push in the right regulatory direction. The department approved a surety bond issuance from Continental Heritage Insurance Co. Continental is also offering surety bonds to licensed cannabis businesses in Ohio. Surety bonds provide cannabis industry players of a way to make sure they can can comply with relevant regulations. For instance, if a company’s product was contaminated, the bond would allow the company to cover costs of destroying or otherwise disposing of the product. Such material could not just be thrown in the trash. In the case of California, the insurance regulator department appears aggressive in its support for the cannabis industry — and making sure it’s properly insured. When it comes to U.S. cannabis businesses, Canada has a competitive edge as medical marijuana is legal at the federal level, and recreational use will likely be legalized this year. Consequently, institutional capital is flowing into Canadian cannabis businesses. Last year liquor company Constellation Brands (STZ – Get Report) invested more than $200 million in a cannabis company, and another company set its self up for the $1 billion acquisition of CanniMed Therapeutics Inc. that was funded partially by a large PIPE transaction. California’s position may create a conflict with the federal’s government’s hostile policy changes on cannabis as delineated by attorney general Jeff Sessions, but that may not be a problem at the moment in the Golden State. The federal government in the U.S. has been known to alternate between passive and aggressive policies on cannabis enforcement. This regulatory uncertainty is one of the factors that makes institutional investment in the industry highly problematic. “Californians voted to legalize the adult-use of cannabis in 2016 and the medical use of cannabis in 1996,” a California Department of Insurance spokesperson told the TheStreet. “The department will continue to encourage insurers to write cannabis insurance products for the cannabis industry.” They added, “Moreover, as long as the Rohrabacher-Blumenauer amendment is in effect, which it is until March 23, the federal government cannot use federal funds to prosecute state-compliant medical cannabis businesses.” The insurance department has its own goals. “Cannabis businesses should have insurance coverage available to them just like any other California business,” Insurance Commissioner Dave Jones said in a Feb. 21 news statement. “As Insurance Commissioner, my mission is insurance protection for all Californians, which includes insurance for California’s legalized cannabis businesses. I encourage more insurance companies to file cannabis business insurance products with the department to meet the needs of this emerging market.” It remains to be seen how much of a conflict will develop between California and the U.S. federal government. https://www.thestreet.com/story/14501469/1/cannabis-surety-bond-hits-the-market.html

As insurers move away from their legacy systems and onto more flexible platforms such as Guidewire and Duck Creek, the days appear numbered for portal solutions. Real-time data exchange is now front and center as a priority for the Insurance Broker Association of Canada (IBAC), the national broker association announced Tuesday. The current work towards real-time data exchange is possible because insurance companies have spent a lot of time and “hundreds of millions” of dollars updating their legacy systems, says Michael Loeters, co-chair of IBAC’s technology committee. “What [the insurers’ platform updates] have allowed us to do is move away from portals, which insurance companies have spent a lot of time and money building over last number of years,” Loeters said. “The reason why they were limited to portals was because they didn’t have the technology platforms behind those portals that could easily or cost-effectively with a broker management system. “As those legacy systems move away, and as you replace the back of those portals with modern, flexible platforms, now you have created the enablement for real-time integration with brokers.” Portals were a necessary bridge to real-time data exchange, Loeters pointed out. He likened the evolution of broker tech to the evolution of GPS technology since the 1990s. “There are a lot of technologies out there that people talked about for a long time before they became a reality,” Loeters said, referring to broker discussions about real-time data exchange. “For example, if you bought a GPS unit in the early 2000s, it didn’t work well. A lot of times, it took you to the wrong place. It took a lot of time to evolve to the point where it was ready for prime time.” Now upon us is the era of real-time data exchange, which features heavily in IBAC’s three tech priorities moving forward. IBAC’s three major tech priorities are: First, IBAC has launched its “IBAC D/X Action Plan” to ensure the national adoption of its Data Exchange (D/X) Model as the method for real-time technology integration between insurance brokers, insurance carriers and partners. This will include plans to develop an assessment of the readiness of insurers and broker management system (BMS) vendors across Canada, and the creation of a D/X Certification process. Second, IBAC is urging identification of “off-the-shelf” technologies that can be adopted by the industry to enable faster and easier real-time technology integration between brokers and industry partners using the D/X Model. Examples might include Duck Creek’s ‘Agent Connect,’ essentially a translator that allows Canada’s major broker management systems to connect with the Duck Creek platform. Similar, translator-style offerings are available from Brovada and Willis Towers Watson. “As brokers we need to strongly encourage insurers to make those kinds of investments [in off-the-shelf technologies] to move away from portals top real-time integration, and then we both win,” said Loeters. Third, IBAC will be conducting a National Broker Technology Survey. https://insurtechnews.com/aggregator/portals-are-dead-brokers-have-moved-on-to-realtime

Peabody’s use of third-party surety bonds aims to to help liberate the cash it has tied up in bank guarantees. Big insurance companies will provide Australian governments with financial guarantees linked to the rehabilitation of coal mines run by Peabody Energy, under a third-party surety bond issuance that Peabody believes is a first for the Australian mining industry. Read more … http://www.afr.com/business/mining/peabodys-mine-rehab-bonds-an-australian-first-20180213-h0w0tp

LDWICK, N.J.–(Business Wire)–In this A.M.BestTV episode, A.M. Best’s Senior Financial Analyst Robert Valenta and Senior Research Analyst David Blades review a new report that examines the growth of the U.S. surety insurance segment and the forces shaping it. Click on http://www.ambest.com/v.asp?v=surety218 to view the entire program. Bolstered by strong construction activity, surety underwriters continue to benefit from consistent premium growth and strong levels of underwriting income. “Underwriters of surety coverage have been producing favorable results over the past decade,” said Blades. “Not only has premium growth been achieved, but despite pretty heavy market competition, underwriting income also has consistently been produced during the same time frame. The post-recession economic recovery, which has positively impacted the construction industry, has been a driver of the premium growth for the surety market in that the construction industry is the main source of business for surety writers,” continued Blades. The report states that the 2017 premium level is on track to surpass the $6 billion mark for the first time this decade. Valenta believes that competition has played a role in creating this premium level. “Profitability within the sector has added a lot of new entrants, which has really increased the capacity as well as heightened the level of competitiveness and created a continuation of soft market conditions. Generally, profitability within the top carriers is better than the entire industry, and this is mainly due to increased scale, niche market expertise and strong relationships with agents and brokers,” said Valenta. http://www.digitaljournal.com/pr/3648359

In the State of the Union address, President Donald Trump called for $1.5 trillion in infrastructure spending from a combination of federal, state, and local government sources working along with the private sector. The funds are much-needed: America’s crumbling roads and threadbare broadband coverage have been well documented—as has the impact of this lack of investment on economic development and urbanization. A unique part of the framework of the U.S. infrastructure plan is that it will likely encourage increased use of the public-private partnerships (PPP or P3) model—a formal arrangement between a government body and private-sector organization to design, finance, build, and operate projects. PPPs have been used in the past, especially in privately operated toll roads, but they have also been responsible for some high-profile US infrastructure projects such as the $4 billion renovation of LaGuardia International Airport and the $852 million Presidio Parkway in California. The U.S. lags behind Canada and Europe when it comes to the use of PPPs to rehabilitate and upgrade its infrastructure. This is due to a number of factors, including: a lack of enabling legislation in certain states, a shortfall in government expertise in managing PPPs, and the prolific use of municipal bonds to fund local infrastructure. What’s more, there are big disagreements over the benefits and drawbacks of PPPs. Depending on whom you talk to, PPPs are either a miracle cure for the country’s ailing infrastructure or a potentially thorny arrangement that can leave governments and taxpayers on the hook for decades. As governments look to mobilize their resources to repair existing infrastructure or take on new projects, they need to understand how PPPs have been used in the past, and how they could be beneficial in the future. We’ll take a look at five considerations government officials and other stakeholders should keep in mind as they weigh whether or not to use PPPs for that next big infrastructure project. To date, PPPs have accounted for a small portion of all infrastructure projects executed in the U.S. This arrangement has been used more frequently for toll roads, but, according to the Congressional Budget Office, PPPs made up just 1 percent of total spending in this category from 1989 to 2011. And while 37 states had passed PPP-enabling legislation as of January 2017, to date, the entire U.S. has a total of only 42 surface transportation projects procured as PPPs. Indeed, 35 states have never undertaken a single public-private transportation project. o benefit from the increased spending in the proposed federal infrastructure plan, state and local governments must become more familiar with how to use PPPs and manage their complexities. Tariq Taherbhai, Chief Operating Officer, Global Construction and Infrastructure, Aon, offers five considerations to keep in mind when evaluating PPPs as an option. Clearly define the immediate and long-term risks and rewards of PPPs While PPPs are often praised for the way they mobilize resources to undertake ambitious projects that would otherwise have remained on the drawing board, determining their total costs and benefits can be difficult. Complicating factors include: Duration of contracts Financing terms Responsibility for construction and maintenance Usage volumes Guaranteed margins For example, in the $1.4 billion Goethals Bridge replacement, the Port Authority of New York and New Jersey will collect toll revenues, but has committed to pay the private developers more than $56 million a year for 40 years, contingent on the performance of the bridge. Such arrangements, in which local governments promise substantial payments, are common, but they run the risk of diverting much-needed funds from public coffers. Governments can structure PPPs to shift the risk for construction, maintenance, and even revenue to private entities. For example, in Indiana, a private consortium in 2006 purchased a 75-year lease on a 157-mile toll road for a $3.8 billion upfront payment. When the global financial crisis and low traffic volumes pushed the consortium into bankruptcy, Indiana got to keep the money from the purchase while the toll road continued operations. Build PPP management capabilities One of the reasons that relatively few PPP deals have closed is that many government entities do not have the capacity or capabilities to negotiate and manage them. Taherbhai explains: these agreements can be complex and include terms for everything from maintenance standards, fee setting, and other risk sharing elements. Further, negotiations can often stretch on for months, putting significant burden on agencies whose staff is already stretched thin. Some government agencies have formed dedicated units tasked with procuring, negotiating, and managing PPPs. Such teams can handle quality control, policy formulation and coordination, and selection and negotiation with the private entities interested in entering into PPPs. For example, the state of Virginia, an early adopter of PPPs, has governmental units dedicated to managing these projects. Look beyond just financing Low interest rates and the robust U.S. municipal bond market mean that public financing of infrastructure projects can be cheaper up front than private sources, meaning PPPs are often promoted as a key funding source for infrastructure projects if public capital is not readily available for that project. However, Taherbhai advises that viewing these arrangements purely through a monetary lens can overlook other potential benefits. Instead, government officials should also be aware of the other benefits PPPs can offer, namely expertise in sourcing, procurement and project delivery. For example, many public infrastructure projects suffer from delays and cost overruns—issues that the private sector, with its focus on efficiencies and cost-savings, can help mitigate. Factor in total cost of ownership Governments should be taking into account the total cost of ownership of the infrastructure project through the entire life of the asset, rather than focusing purely on the initial cost of construction. “PPPs can be used to build new infrastructure, but one of the key benefits is bringing certainty to the public sector of the cost and quality of infrastructure throughout its life,” explains Taherbhai. For example, Pennsylvania’s recent decision to use a PPP to replace over 550 structurally deficient bridges means the state will only pay