Bad Credit Programs
Tremendous changes have been brought about in the surety bond industry since the turn of this new century. What once was the soft market, now agents are finding themselves with much work ahead of them. Accounts that were dropped by previous bonding companies now are seeking new agents, which are forced to find new markets for their customers. This is a very difficult task for many bond companies with credit issues. Extensive collateral was required to a principal with bad credit. As a result, Bad Credit Surety Bond Programs were put into place to fullfill the capitalist idealology of supply and demand.
High Risk Programs
By tradition, surety bond underwriting tries to achieve a 0% loss ratio. Simply put, bond companies would only write bonds if there were little or no chance of having a claim. Conversely, Bad Credit Bond Programs came into effect and underwriting was closer to insurance policies. This program would write higher risk accounts, rather than 0% loss ratio, and were approved at a higher rate. Claims were automatically built into the premiums with accounts in which claims were more likely.
As mentioned above, with the Bad Credit Programs, so came collateral requirements. Bonding companies took no pleasure in this because of the additional and unnecessary paperwork. Instead, Bonding companies raised premiums higher to replace the collateral requirement. Sometimes this was favorable to the principal and other times it was a disadvantage. Other programs that did not require collateral cost less for the first year however, the programs that did require collateral were more cost effective eventually. The reason was the collateral was returned approximately one year after the release of the bond.
For obvious reason, some bond agencies will omit to their clients that there are alternatives to surety bonds. JW Bond Consultants Inc. believes in giving you options. Perhaps an Irrevocable Letter of Credit (ILOC) would be more suitable than a surety bond to the obligee. Those who have liquid assets may think this is a better option. In other words, a bank can freeze $75,000.00 cash for an ILOC. This can replace your $75,000.00 bond. The 1% service fee that banks usually charge is less costly than expensive High Risk Surety Bonds. For those who do not have liquid assets for an ILOC, maybe the high risk bond is your better option. After you compare the costs between an ILOC and a high risk surety bond, you can make an intelligent decision for what is best for you. Choose the bond if the additional cost of the bond is worth having increased liquidity. Choose the ILOC if cost over time is more valuable to you than liquidity. Keep in mind that the money market rate is now 4%. With the 1% mentioned above, that means the ILOC is actually 5% annually. To learn more about other considerations and compare in greater detail, read â€œSaving Money Using Surety Bondsâ€?
The key is – you have choices. We pride ourselves in expert advice even at the risk of not writing bonds to the principal today. When clients realize that our concern is in their best interest, they return and remain with us. This is one reason we are still here today.
Are Bad Credit Bond Programs here to stay?
Since Capitol Indemnity Corporation, the founder of High Risk Programs, started this program over 3 years ago; they are profitable and running strong. Because of Capitolâ€™s success, other companies have started writing their own high Risk Program and have proved successful as well. More companies are willing to write High Risk Bonds than ever before. This is good news for the principal with bad credit. There more sureties to choose from and the costs are similar among competing companies. Consequently, premiums should decline with the increase of bond companies writing more bonds. Never the less, this is high risk underwriting and still considered to be a minority in the bonding industry.
In a strong market, commercial bond accounts would post a letter of credit but with the market yet recovering soft, they find it difficult to do so. Capitol Indemnity has written many who were left high and dry. High risk programs are high premiums although cost are likely to drop in years forthcoming. Even though there are alternative to these high premiums, bonding companies can still make a profit writing high risk bonds and the market for high risk will remain.
Yes, bad credit bond programs are here to stay.