What to expect from the Underwriting Process

As a business a new business owner, you may not have a clear understanding of the surety bond process and who does what when it comes to helping you secure the right bond for your business. The surety bond underwriting process is crucial and understanding what to expect from the process will help you make the right decision when it comes to contacting a surety agency. We will walk you through what happens within a surety underwriting department, how it affects your surety bond rates, and how to secure a surety bond quickly and at a low cost, all with The Surety Place by your side!

What is Surety Bond Underwriting?

Surety bond underwriting is the process of a surety agency assessing the risk level of a principal prior to approving the bond application. The objectives of the surety underwriting process go as follows: 

• To write surety bonds for principals who have a low risk of a claim being made against them or their business. 
• To write surety bonds for principals who have enough capital to reimburse the surety if a claim is paid on their behalf

In order to meet these objectives, the surety will conduct an underwriting review of the principal’s credit, financial situation, and personal history. The surety will evaluate the following:

• A principal’s professional capabilities should include the capacity to complete all of their obligations. 
• Financial Stability: The principal should be financially secure and have quick access to funds. 
• Personal Character: A principal should be of good moral character and obey the norms and laws of his or her profession. 

What criteria does a surety use to evaluate these qualities in a principal? Below, we’ll look at how sureties assess a principal’s risk level and the criteria that surety underwriters consider. But before we get started, it’s crucial to understand the difference between insurance underwriting and surety underwriting.

What Happens During the Underwriting of Surety Bonds?

The steps in the surety bond underwriting procedure are as follows: 

• A surety agency or a surety bond broker is used by the principal to obtain a surety bond. 
• The principal provides the surety with accurate and truthful information about their business and financial history on the bond application. 
• The surety examines the principal’s financial statements and history in more depth. 
• The surety supplies the principal with a surety bond premium quote based on the risk level determined by the underwriters. 

The process is straightforward in regard to the principal while the surety’s underwriters use a number of indicators to establish a principal’s risk. 

Underwriting for Insurance vs. Underwriting for Surety

Most individuals are aware that underwriters are used by insurance agencies to establish risk levels. Many jurisdictions categorize surety bonds as a type of insurance, which adds to the possibility of misunderstanding. 

The main difference between insurance underwriting and surety bond underwriting is that an insurance company anticipates claims on its policies. Most insurance plans cover events outside the policyholder’s control, the insurance company factors in the possibility of a claim in its pricing model while surety bond agencies do not anticipate claims being made against the bond. Part of the underwriting process evaluates the risk of the principal, low-risk contenders are ideal clients for surety agencies as they offer minimal risk.  

With insurance, you are responsible for only paying your deductible whereas with a surety bond, if a claim is made against the bond, the principal is ultimately responsible for repaying the surety for any money paid to a claimant. The majority of the time, a claim is never made against the bond. As a result, a surety bond functions more like a line of credit or an indemnity, and the surety does not price the bond with the anticipation of paying out a claim on every issued bond.

You can think of a surety bond as a legally enforceable financial obligation with contingencies in place for repaying the surety in the event of a claim. The best way to avoid a claim being made against your surety bond is to constantly follow your industry’s regulations and ethical guidelines to avoid all claims in the first place.

What Qualifies Surety Underwriters?

As we have discussed, the surety bond underwriting process consists of assessing the risk of each principal applicant. These risks can include:  

• Low credit score
• Filed for bankruptcy at any point
• Felony conviction(s) 
• Insufficient relevant experience 
• High Debt
• Previous claims on the principal’s surety bond 
• Revocations, suspensions, or disciplinary proceedings were taken against the principal in the past 
• Several lawsuits have been filed against the principal
• Liens for unpaid taxes on the principle 

Any of the aforementioned criteria can increase a principal’s surety bond rates, but credit score is especially essential during the surety bond underwriting process. Keep in mind that a surety bond is much like a line of credit. As a result, any credit problems that make getting a loan or a credit card more difficult will likely raise surety bond prices.

During the underwriting process, the surety will also look into the terms of the bond and any of the following surety bond terms or specific types of surety bonds may increase the risk associated with approving the principle for a surety bond: 

• Types of surety bonds that statistically have a higher claim rate
• Bonds with a hefty penalty sum
• Multi-year term surety bonds. 
• The use of language that makes the surety accountable for an amount more than the penalty sum is discouraged. 

Once the risk is assessed, the surety’s underwriters will calculate a premium and provide the principal an estimate based on their review of the principal’s financial and bond history and the specific bond conditions. 

Surety Bonds That Do Not Require Underwriting

Underwriting is not required for all types of surety bonds, such as some car title bonds, certain contractor license bonds, notary public bonds, and public insurance adjuster bonds, because they are statistically considered low-risk in terms of potential bond claims. Principals may buy these “pre-approved” surety bonds from The Surety Place for a set charge and without having to go through an underwriting process. 

Simply provide your basic information, such as the state where your business is based and your name as it will appear on the bond, pay the cost, and  The Surety Place will email you an instant surety bond approval. In these circumstances, your formal surety bond will be delivered to you immediately or through email, generally the same day. These rapid surety bonds, like most other surety bonds, must be renewed on a regular basis (typically on an annual basis).

What Is the Price of a Surety Bond?

When a principal applies for a surety bond, he or she will pay the bond premium which is a small portion of the total bond amount. A principal with good credit and favorable financial history might anticipate paying between 1% and 3% of the bond amount. Principals with poor credit ratings or other risk indicators, on the other hand, will generally pay higher rates. 

When the principal receives the bond premium quote from the surety agency, he or she has the following options:

• Accept the quote and proceed with the surety bond purchase
• Look for a different surety or surety bond broker to get a quote from
• Work with the surety to come up with strategies to reduce the premium. A co-signer or a collateral deposit agreement may be utilized to reduce the premium in some instances. 

The last choice is especially significant for principals who may face higher rates as a result of a poor credit score or other considerations. 

Getting Your Surety Bond Renewed

Most surety bonds are valid for a specific amount of time, which is set by the type of bond or the obligee. Certain surety bonds, such as bid bonds, are released once the specified project is completed in full. Each surety bond has its own set of terms, talk with your surety agent to learn when your bond is set to expire. 

When you want to renew your surety bond, you’ll have to go through a new underwriting process but in most cases, the process is much simpler the second time around and you will likely pay the same premium as before unless your financial status has changed. Other things that can affect your bond premium changing during the renewal process include:

• Your business has been sued
• A claim against the bond
• Or any other underwriting consideration has been altered

Contact The Surety Place Today

Do you have any further questions concerning the surety bond underwriting process, surety bond applications, or surety bond premiums? Our surety bond specialists at The Surety Place are here to help. Apply online or contact a team member directly! We provide fast approvals and affordable rates!