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Surety underwriting is the procedure by which surety companies assess the risk of providing a surety bond to an applicant. The expert in charge of this assessment, a surety underwriter, is essential in evaluating the conditions of the bond and the suitability of an application.
With that being said, we need to define what a surety bond is. A surety bond is a legally binding contract that acts as an assurance that a business or an individual will perform their obligations. This includes but is not limited to meeting contract conditions and adhering to legal and regulatory requirements.
Surety bonds involve three parties:
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The Principal: The person or company that buys the bond to ensure work output in the future.
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The Obligee: The entity that needs the bond to guard against default or loss. Usually a client or a government agency.
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The Surety: The surety bond provider that backs the bond on behalf of the principal and gives the obligee a financial guarantee.
The Surety Underwriting Process
The first step of the underwriting process is applying for a bond, which can be done online and is typically quick. If any additional information or documents could help an applicant get a better quote, the surety agents would contact the applicant to help them.
To start the application, one must provide the following documents:
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Business and personal financial statements
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Business and personal income tax returns for the business owner
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Bank statement and letter of reference
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Balance sheets
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References from suppliers with which your business has contracted
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Certificate of Insurance
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Work in progress from detailing all of the projects your company is currently engaged in
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Past projects completed within the past year
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Resumes of key personnel within your company’s leadership structure
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Organizational chart
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Business address and phone number
Underwriters then assess the applicant's overall risk, credit history, and financial situation after reviewing the submitted documentation. The applicant's credit score, business assets, employment experience, and reputation in the industry are all important considerations.
Once the risk assessment is completed, the applicant receives a bond premium quote from the surety firm. The surety business files the required bond documentation and ensures compliance with all applicable requirements if the applicant accepts the quote and pays the bond price.
Duration of the Underwriting Process
After completing the application process, the underwriting process can take one to four business days. A surety bond will normally be issued 24 to 48 business hours after all of the paperwork has been received, which includes the indemnification agreement and premium payment.
Factors affecting the duration of the process
Several factors can affect the process, including the bonding company's underwriters. To expedite the process, the surety bond company will send one’s application to the appropriate bonding business the same day it is received.
Certain bonds are granted quickly - on the same or next day, such as $150,000 and below commercial bonds, while others, such as contract bonds, may require a bit more time. Following approval, the bonds are normally issued one to two days after the receipt of payment, along with any additional paperwork the surety requests to release the bond.
Purpose of Surety Underwriting
The main purpose of surety underwriting is to detect high-risk applicants and reduce the number of claims. Surety bonds protect the public from fraudulent practices. If a claim is found to be legitimate, the surety may need to reimburse the claimant up to the bond amount. After that, the bondholder will have to reimburse the surety fully.
What Surety Underwriters Look For
A good surety underwriter would look for reasons to approve an applicant. There are several key factors when evaluating an applicant's eligibility for a bond:
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Credit score: One critical component of this evaluation is the applicant's credit score. A high credit score indicates trustworthiness and financial responsibility. A low credit score can signal a higher risk, suggesting past difficulties in managing financial obligations. Underwriters consider applicants with a score above 600 reliable enough to be approved. The higher the credit score is, the lower the cost of the bond would be.
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Financial stability: Being in business for a long time combined with the profitability and financial stability of the company gives a positive indication that the applicant will be able to fulfill their surety bond obligations. The underwriters also consider the liquid assets of the applicant. If the applicant has sufficient funds in their bank account, it reassures the surety that they will be able to recover the full amount in the event of a claim against the bondholder.
Handling Denials
Reasons for Denial
Financial problems like tax liens, bankruptcy, or excessive debt are sometimes grounds for denial of applications since they suggest a larger risk to the assurance firm. Legal concerns, such as litigation or license suspensions may also result in denials. They may indicate instability or dependability. The applicant must respond to the underwriter's precise reasons in the case of an application rejection.
Steps to Dispute Denial
To dispute a denial, applicants must provide updated information that addresses the underwriter's concerns, such as resolving outstanding debts, clearing tax liens, or providing evidence of legal settlements. Applicants can improve their financial documentation by providing recent statements or a stronger credit score. Open communication will demonstrate improved reliability and financial stability, increasing the likelihood of approval.
Surety vs. Insurance underwriting
Surety bonds and insurance policies are often used interchangeably but differ significantly. A surety bond, in contrast to insurance, is a three-party guarantee rather than a two-party contract. While insurance is meant to make up for losses the insured party suffers, a surety bond ensures the obligee is covered if the principal fails in their duties.
Risk Evaluation
Surety underwriting involves the bond principal bearing the risk, while the surety company guarantees the obligee. The company assesses the principal's ability to fulfill bond obligations by evaluating their integrity, reliability, and financial health. If a claim is made against the bond, the surety company may initially pay the obligee but seek full reimbursement from the principal.
Insurance underwriting involves the insurance company bearing the risk in exchange for premium payments from the insured. The insurer evaluates the likelihood and potential cost of claims based on risk factors, and the insured seeks protection from potential losses. This transfers the risk from the insured to the insurance company.
Premium Calculation
The surety bond premium, a percentage of the bond amount required, is determined by the applicant’s personal credit score and financial health. Applicants with higher scores and stronger financials are considered lower risk and offered lower rates, typically ranging from 1% to 5% of the bond amount. Lower credit scores may face higher rates, up to 15%, reflecting increased risk.
Insurance premiums are determined based on the risk the insurance company undertakes in providing coverage. This assessment involves evaluating factors such as the magnitude of the potential risk and the probability of its occurrence. The company's goal is to set a premium that adequately balances the risk while remaining fair to the policyholder.
Frequently Asked Questions
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