If you are in need of a surety bond, it�s important to understand the steps required. Read on to learn more about the surety bond underwriting process, or request a quote today. At Single Source Insurance, we offer bonds nationwide, and our knowledgeable agents are ready to assist you with any questions you may have.
What Is Underwriting?
Underwriting is all about the assessment of risk, specifically financial risk. It�s the process through which an individual or institution decides to take on a given financial risk for a stated fee and under what circumstances. For example, if you�ve ever purchased life insurance, you may have had to undergo a physical exam. You were likely asked your age, your height and weight, and certain other key facts that the underwriters then used to determine your likely life expectancy, insurability, the terms and conditions of your policy, and the premium cost you would pay.
Surety bond underwriting is much the same. The underwriters� job is to determine the degree of risk involved in issuing a given type of bond to a given applicant and the premium cost to the applicant.
What Are the Risks?
Different types of surety bonds carry different risks in terms of the ways in which the bonded individual (the principal in the surety bond agreement) can incur a claim. But they all boil down to the principal committing a prohibited action or failing to perform a required one. In either case, the principal would be in violation of the terms and conditions of the surety bond, and the entity protected by the bond (the obligee) would be entitled to file a claim against the bond to recover any resulting financial loss.
The bond forms filled out by surety bond applicants spell out the principal�s obligations under the bond and reflect the governing regulations, statutes, and ordinances. The obligee that requires and is protected by the bond establishes the required bond amount, also known as the penal amount of the bond.
The underwriters need to learn enough about the applicant to determine:
- The risk that the applicant will somehow violate the terms and conditions of the bond to the financial detriment of the obligee
- The applicant�s ability to come up with the funds to pay any valid claim up to the full penal amount.
The Three C�s of Surety Underwriting
Surety underwriters examine certain facts to establish confidence in each applicant�s character, capacity, and capital. A principal with good character is less likely to engage in unlawful or unethical behaviors that could result in a claim against the bond. A principal with the capacity (skills, knowledge, and resources) to live up to the terms and conditions of the bond is also unlikely to incur claims. And capital enters into the picture because the principal is ultimately financially responsible for paying all valid claims.
What Do Surety Underwriters Consider?
One of the key factors that surety underwriters consider is the applicant�s credit score. A principal with good credit will pay a lower premium rate than one with poor credit, because a good credit score means that the principal should be able to borrow money if necessary to pay a claim.
This is important because surety bonds do not transfer the financial risk of paying claims to the surety company. Virtually all bonds contain indemnity clauses that provide financial protection for the surety. The surety typically will pay a claim as an interim measure, but the principal is then legally obligated to reimburse the surety. Therefore, an applicant�s ability to borrow is crucial to establishing the confidence of the underwriters.
In addition to an applicant�s credit score, surety underwriters will want to see personal and often business financial statements as proof of capital and financial stability. In some instances, underwriters will request resumes or other proof of expertise and experience. In fact, the underwriters my request any documentation they feel is necessary to evaluate the applicant�s character, capacity, and capital.
Understanding the Risks Involved in Surety Bond Underwriting
Single Source Insurance offers a full range of bonds nationwide. To get started, simply fill out our online application form. Our knowledgeable agents are ready to answer any questions you may have about the underwriting process.