Surety Bond News

The world of surety seems to be doing just fine amidst the down economy. There are still a lot of construction jobs available and many bonds to be written; but could the healthy appearance of the surety industry be somewhat of an illusion? (more…)

Legislatures in Texas have enacted a new law directly affecting the surety bond industry. When one looks at the changes included in the bill, it’s hard to see what it actually accomplishes; it raises the question of whether the legislators writing laws affecting the world of surety have adequate knowledge of the industry.
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The surety bond industry has been stubborn when it comes to any kind of change. For the most part, things have been done the same way for years while ignoring technological advances. As of recent, companies have begun to embrace the digital age and have been harnessing it to improve and evolve the industry.
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There are countless clients calling us at JW Surety Bonds who are surprised and even frustrated when they find out how much a bond will cost them. Many of these customers have had bonds years ago claiming they only had to pay a fraction of what they are being asked to pay these days; what many people don’t understand is that the surety industry has a consistent pattern when it comes to bond underwriting.

Commercial and contract bond underwriting was very lax several years ago; but in this article I’ll be speaking on commercial bonding. There was a flat rate that would be charged for most commercial bonds which mostly depended on the type of bond and amount. No matter what the client’s financial condition was, whether good or bad, bond premiums were pretty consistent. As a result of sureties writing bonds so laxly, an influx of claims arose against the bonds. The claims were a lot of stress on the surety companies because they were the ones backing the bonds and any claims that arose. Although the surety company will go to the client with the bond claim for reimbursement, many clients couldn’t pay the claim because of their weak financial condition which was not researched prior to the bond issuance. This made the surety companies become much stricter when it came to assessing clients in search of bonds, specifically when it came to their financial strength and responsibility.

Let’s fast forward a bit to the present. Now, as oppose to charging flat bond rates dependent on the bond type and amount, it’s now based off of the client’s financial strength which is strongly based off of credit, personal, and business financials. The surety company will look at your credit history, which is used as a gauge as to how you handle financial responsibility. Depending on your credit history, the surety will charge a percentage of the bond size (roughly 1-20%). Now should you be a client with bad credit who had a bond a few years earlier before sureties became more stringent, you will more than likely see a large increase in the cost for a bond because it’s no longer a flat rate bond premium but a percentage of the bond amount calculated using your credit history and financial responsibility.

Many people find this increase in bond cost unfair. When it comes down to it your credit history is an efficient way to assess how you handle your financial obligations; this helps assure that if a claim does arise, you‘re not only capable but willing to pay the claim. The surety industry is cyclical; there is a back and forth pattern when it comes to bond premiums and approvals. Sureties will go from being very lenient, selling bonds and approving anybody and everybody, many claims will arise from these bonds costing the sureties thousands, which will then result in sureties becoming much stricter when it comes to bond approvals. Once the surety’s approval process is more conservative, they bring in much less money which forces sureties to slowly become more lax. At the moment, we seem to be somewhere in the middle of this cycle.

Changes in the surety bond industry are few and far in-between, but the conservative/non-conservative bond approval cycle is one consistent element that shifts in the surety industry. Credit based bond premiums are much more sound and accurate when dealing with financial accountability and potential claims. Although it doesn’t happen often in the surety world, change is welcome in our eyes because it has often facilitated innovation within the industry.

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.