PATCHMANIA, LLC

A SUBSIDIARY OF GLOBAL SURETY UNDERWRITERS, INC.

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Everything You Need to Know

About the Surety Underwriting Process

What can you expect from the surety bond underwriting process, who are the surety bond parties, and how do the various elements of the process interact?

Surety bonds are a requirement for many different kinds of businesses. From financial guarantee bonds to contractor bonds, it’s important that businesses obtain a surety bond to guarantee their obligation to their clients and the agency requiring the bond. As part of getting your surety bond, you’ll often need to go through the surety underwriting process. 

Surety Bond Parties

Basically, a surety bond is a legally binding financial guarantee for a contract or obligation. Surety bonds are structured as an agreement between three parties. The surety bond parties are:

Principal

The party that applies for and obtains the surety bond (usually a business or individual)

Obligee

The party that requires the principal to obtain the surety bond

Surety

The neutral third party that provides the financial guarantee for the principal’s obligations (Global Surety Underwriters, Inc.)

The Surety always takes on a level of risk by writing a surety bond for a principal. To minimize this risk, the surety will typically use an underwriting process.

Surety Underwriting

Surety underwriting is the process that a surety uses to evaluate a principal’s risk level. The goals of the surety underwriting process are:

  1. To write surety bonds for principals who are less likely to have a claim filed against them.
  2. To write surety bonds for principals who will pay the surety back if the surety does pay a claim.

To achieve these goals, the surety will analyze the principal’s credit, financial position, and personal history in the underwriting process. The surety will be looking for evidence of three things:

  1. Professional Capabilities: A principal should have the capability to fulfill all of their contracts. 
  2. Financial Stability: A principal should be financially stable and have access to a ready supply of capital.
  3. Personal Character: A principal should have solid moral character and be likely to follow the rules and laws of their profession.

Insurance Underwriting vs. Surety Underwriting

The key difference is that an insurance company expects claims to be made on its policies. Because insurance policies mostly cover circumstances out of the policy holder’s control, the insurance company includes an eventual expectation of a claim in its pricing model. 

Most surety bonds never have a claim made against them, and the principal is ultimately responsible for paying the surety back for any money paid to a claimant. That means that a surety bond is more like a line of credit or an indemnification, so a surety doesn’t price the bond with   much of an expectation of absorbing the financial impact of paying out a claim.

Because the principal must repay the surety for any claims, it’s critical to consider a surety bond as a binding financial obligation and to have contingencies in place for repaying the surety if a claim is filed. However, the best policy is always to follow the laws and ethical rules of your industry to prevent claims from being filed in the first place.

What Happens During the Surety Underwriting Process?

The surety bond underwriting process follows these steps:

  1. The principal applies for a surety bond through a surety company (Global Surety Underwriters, Inc.). 
  2. On the bond application, the principal provides information to the surety about their business and financial history. 
  3. The surety performs a more detailed evaluation of the principal’s information and history.
  4. Based on the risk level that the underwriters determine, the surety provides the principal with a quote for a surety bond premium. 

The process is relatively simple on the principal’s end. Behind the scenes, however, the surety’s underwriters are using a wide variety of factors to determine a principal’s risk level.

Factors Surety Underwriters Look For?

Surety underwriters look for anything in a principal’s personal and financial records that might indicate an elevated risk of surety bond claims. This can include: 

  • Low credit score.
  • Having declared bankruptcy.
  • Felony convictions.
  • Lack of relevant experience.
  • Large amounts of debt.
  • Previous surety bond claims against the principal.
  • Previous license revocations, suspensions, or disciplinary actions against the principal.
  • Lawsuits against the principal.
  • Tax liens against the principal.

Any of the above factors will raise a principal’s surety bond premiums, but credit score is particularly important for the surety bond underwriting process. Remember that a surety bond is similar to a line of credit. Thus, any credit factors that would make it more difficult to get a loan or a credit card will also usually increase surety bond premiums. 

The surety will also examine the terms of the bond required during the underwriting process. For a surety’s underwriters, any of the following surety bond characteristics will increase the risk level of bonding a principal:

  • Types of surety bond that frequently have claims filed against them.
  • Surety bonds with a large penalty sum.
  • Surety bonds with multi-year terms.
  • Language that leaves the surety liable for an amount larger than the penalty sum.

Although we don’t provide the exact methodology that we use to weigh each factor, we use a combination of old-fashioned investigative diligence and advanced “insurtech” innovations that allow us to automatically rate various factors using big data and algorithms. 

How Much Does a Surety Bond Cost?

When a principal purchases a surety bond, they usually don’t pay the full amount of the penalty sum. Instead, the principal pays a percentage of the penalty sum as a premium. The premium system helps principals meet their surety bond obligations while preventing them from having to tie up large amounts of capital in a surety bond. 

Once the principal receives their premium quote from the surety, the principal may then choose any of the following options:

  • Accept the quote and purchase the surety bond.
  • Shop around for a quote from a different surety or surety bond broker.
  • Work with the surety to find ways to make the premium more affordable.

The last option is particularly important for principals who may be facing higher premiums.

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