Re-evaluating Surety Bond Underwriting

Traditional surety bond underwriting does not allow for any losses. In other words, applicants are only suppose to be approved for a bond if the underwriter believes there will be no claims. This differs from insurance underwriting, as a loss is expected and is built into the premium. Higher risk applicants are usually declined or asked to post 100% collateral with the bond. The surety bond market is starting to see some change in how bonds are underwritten. However, these forward thinking sureties are in the minority and are difficult for the average principal to find.

As stated above, according to traditional surety underwriting bonds are suppose to be written as a service fee, not insurance. Therefore, there are not suppose to be any claims expected, as it is not built into the premium. Unfortunately, the suretyship guidelines are not reality and losses do occur, even the most conservative bonding companies.

Surety bonds have been around for quite some time and we know that losses are inevitable no matter how good the underwriting is. If losses are inevitable, then why not change the underwriting philosophy? If a principal is considered to be a higher risk, then a higher premium rate should be applied. This thinking goes against traditional surety underwriting as losses would then be built into the premium.

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