The surety underwriting procedure can often be viewed as being an agonizing ordeal for insurance agents as well as applicants needing to obtain bonds. Many times, the entire process can be very aggravating and stressful if an applicant is under a specific deadline or needs a bond very quickly. Here are some items that the surety company will most likely require. It is important to know what crucial information that a surety company or agency will require in order to be approved for any type of surety bond.

Like insurance, the surety industry is recurring. In the mid 90s, the surety industry was very pliable, and there was little underwriting being performed. A combination of the slowing economy and the poor underwriting practices from years prior caused the surety industry to suffer for the first five of five consecutive years in 2000. However, a booming economy led to more bond approvals and issuance, even for applicants that were less than qualified.

Fortunately, these losing years caused the market to fluctuate almost overnight underwriting standards were tightened and premiums increased substantially. Capacity quickly became an issue for contractors, particularly at both the small and large ends of the spectrum. Small, emerging contractors were finding it increasingly more difficult to obtain any bonding capacity and large contractors were also feeling the affects of the more stringent industry. The market has fluctuated over the past couple of years, and contract bonds and some commercial bonds can still be difficult to obtain. Some items that are crucial to obtaining prior to applying for a surety bond are:

A surety bond is a form of credit. The underwriter requiring financial information from an applicant is making a credit decision without ever meeting the contractor or applicant.. There may be a substantial amount of paperwork required; however, it may be the extra paperwork required that will get an applicant approved for a bond. An underwriter will most likely request the following:

Business financials It is beneficial and most often a requirement that these are prepared by a CPA. If it is a new company, submitting the most recent business financials will suffice.

As an agency, we focus the majority of our marketing efforts on the Internet. The web has been a great source of new business for our agency, but not for all lines of business. For instance, construction performance bonds are the #1 premium generator for our industry and yet we saw minimal increases even though we are the top ranking agency in all major search engines for the term. Commercial surety bond volume boomed from the Internet, but relatively few seemed to be searching for performance bonding to guarantee construction via the web. There are a couple of reasons why…

Geographical location - Sureties often are not interested in backing a principal that is too far away from the agent.
More complex underwriting - A contract bond line is much more involved to set up than a simple commercial bond.
People are set in their ways – Most are accustomed to getting their performance bonds from the same agency that does their insurance

Fortunately for all, the times are changing. In 2007 we saw our first year of significant growth for performance bonding from clients finding us online. Why the changes? The world moves at a faster pace now and many sureties want to keep up! Geographical locations are still important, but some forward thinking sureties allow agents to write business anywhere they are licensed. Credit-only based contract programs are expanding their capacity allowing for easier contract underwriting, in some cases more simplistic than commercial bonding. Lastly, many contractors are finding that their old insurance agent simply does not have the markets or experience necessary in the specialized field of suretyship. This forces the contractors to search for an agency that is a better match for them, which often leads them online.

It is clear that the growth of the world-wide-web is not going to stop any time soon. Therefore, it is only natural to assume that the world of online performance bonding only has room to grow!

The term “bond” can be applied to many different financial products, but what is “business bonding”? To be bonded means that an insurance carrier is guaranteeing the performance of your business. This is not be confused with a corporate bond, which is a financial instrument used to raise capital. When a business gets bonded it does not raise capital, but does bring security to any work performed by said business.

How does business bonding work?
When a company is bonded, there are three parties involved. The first one is the company itself, referred to as the principal. The second party is the bonding company, also referred to as the surety or carrier. The third party is called the obligee. The obligee is the party that requires the business to be bonded. Here are two examples…

Example #1: The Contractor – A contractor wants to do work for a local school. The Miller Act is a law that requires the contractor to post a bond to guarantee the work. If the contractor defaults, the surety would pay another contractor to finish the work.

Example #2: The Auto Dealer – An auto dealer wants to obtain a license to sell vehicles in the state that he resides. The state licensing department requires that the auto dealer post a bond to guarantee that he will follow the states rules and regulations for selling vehicles. If the dealer were to be fraudulent, the victim could make a complaint to the state and the state could then file a claim on the bond to help the victim re-coop any moneys lost.

Some common bonding misconceptions
Getting your business bonded helps protect it – Not true, getting your business bonded actually protects your clients! If a claim arises, the surety will look to your company for repayment.

Everyone qualifies for bonding – Not everyone qualifies for surety bonding. True surety underwriting makes it so that only the most financially sound and responsible companies qualify for bonding (However, most do these days with the variety of programs available).

Everyone gets the same rate – Rates can vary greatly and can be changed due to your credit score, company’s financial strength, or what the bond is actually guaranteeing.

If you are in need of a bond, you may want to read our last article, How To Become Bonded. It highlights some of our best articles to tell you how to get the best rate for your bond and what you need to do to ensure you qualify.