Bond Providers Indicate They Can Accommodate Elevated Bond Limits Amid Higher Tariff Rates
Sureties that provide importers with customs bonds say that they're able to handle covering the potentially significantly higher amounts of duties that importers may owe because of tariff rate increases, according to two companies interviewed by International Trade Today.
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An "underwriting limitation" imposed on sureties by the Treasury Department -- set at 10% of a surety's "analyzed statutory surplus," which is a balance sheet item similar to equity -- applies to "any single risk," said Matt Zehner, vice president of surety information and analysis for the Roanoke Insurance Group. It's not a limit on the total amount of bonds that the surety may issue to all customers.
And even with that limitation, sureties will be able to handle the large bonds that will be required from major importers due to this year's massive tariff increases.
"Based on the recent activity we’ve seen in the marketplace, with bonds being issued that are at or above a billion dollars, it does appear the surety marketplace is capable of providing capacity for very large bonds," Zehner said.
That said, some sureties may decide for their own reasons not to take on those risks.
"Some companies have underwriting limitations of multiple billions of dollars; however, each company decides on its own what amount of risk it is willing to undertake. Self-imposed limits may be well below the maximum per-risk limitation set by the U.S. Treasury," Zehner said.
Should an importer need a customs bond that goes beyond the 10% limit, sureties may be able to work with other sureties to procure one bond for an importer that has a higher bond limit, according to James Reiss, president of International Bond & Marine Brokerage.
"The challenge isn’t whether sureties have the capacity to issue larger bonds. The right surety agent is well-equipped with tools to manage these risks such as reinsurance and co-surety arrangements that allow risk-sharing across multiple carriers. Capacity has always been a defining strength of the insurance and surety space, and U.S. Customs provides the flexibility for sureties to structure these solutions effectively," Reiss said.
He continued, "Co-surety partnering can be a practical solution for larger or more complex bond requirements. However, not all importers or customs brokers have direct access to multiple sureties experienced in structuring these types of risks."
Zehner echoed Reiss' thoughts: "Through both reinsurance and co-insurance, multiple surety companies join together to provide the surety capacity if one company is not able to take on the entire risk on its own. The large limit of a bond is shared among multiple companies."
As sureties work through providing customs bonds for importers, importers themselves need to be aware of their options when seeking to increase how much their bond covers.
"As bond amounts rise, it becomes increasingly important for brokers and principals to connect with underwriters who bring strong financial expertise and access to markets that can provide flexible solutions. When a principal’s financials don’t fully support higher bond limits, these underwriters can explore alternative structures to ensure the bond is secured on viable terms," Reiss said.
This is particularly true for importers that have riskier profiles, according to Reiss. These importers may have to have collateral to support their bond requests, Reiss said.
"Higher rates do raise duty amounts and risk, but strong, well-capitalized companies are unlikely to see an impact. However, smaller firms with tight margins and limited liquidity, may face added scrutiny and potential collateral requirements," Reiss told ITT. "Ultimately, collateral decisions will depend on the company’s financial condition, its track record with importing, and the quality of the broker facilitating its entries.
But overall, companies that hold customs bonds also may need to err on the side of getting a slightly higher bond than what Customs may advise.
"The most important step is to take time upfront to assess your true bonding needs. With tariffs on the rise, importers can no longer rely solely on a lookback at the previous 12 months of duties, taxes and fees. Instead, it’s critical to forecast on a rolling 12-month basis, factoring in both anticipated merchandise values and updated tariff rates," Reiss said.