Re-evaluating Surety Bond Underwriting
Below is a MRR and PLR article in category Finance -> subcategory Other.
Re-evaluating Surety Bond Underwriting
Introduction
Surety bonds are traditionally underwritten with an aim for a 0% loss ratio?"meaning they should not incur any losses. Unlike insurance, which anticipates losses and factors them into premiums, surety bonds aren't designed with claims in mind. However, maintaining this standard consistently is virtually impossible.
Traditional Underwriting vs. Evolving Practices
In traditional surety bond underwriting, applicants are approved only if underwriters foresee no claims at all. High-risk applicants often face rejection or must provide full collateral. While some forward-thinking sureties are evolving their approach, these remain in the minority and are hard for many principals to access.
The Reality of Losses
Despite guidelines, losses happen even among the most conservative bonding companies. Since losses are inevitable, it begs the question: Why not shift the underwriting strategy? For higher-risk applicants, sureties could consider higher premium rates which account for potential losses. This method diverges from traditional practices but aligns more closely with reality.
Exploring High-Risk Surety Bonds
Working with some bonding companies, we've successfully arranged high-risk surety bonds. These carry rates 10-15 times higher than standard commercial bonds but still present the best options for those who qualify. Interestingly, we've observed fewer claims in these high-risk programs than expected, proving profitable for the sureties involved.
These few companies dominate the higher-risk niche, as others are hesitant to adopt new guidelines, especially after the decline of softer markets.
Contract Bonds and Market Opportunities
Fewer sureties offer high-risk contract bonds, particularly for long-term agreements. However, progressive companies willing to take calculated risks are seeing success, maintaining average loss ratios around 14.35%?"better than many conservative peers. This success underscores the opportunity for diversification in the market.
Expanding the Industry Mindset
Our agency often encounters underwriters eager to collaborate due to our diverse client base. We rarely partner with new sureties unless they offer something distinct from the competition. To grow, underwriters must step outside conventional guidelines and explore underserved market segments. We've established numerous successful programs with higher premium rates to offset claim costs.
Conclusion
The surety industry must rethink its approach, acknowledging that 0% losses are unattainable. Sticking to traditional methods limits potential. Innovative sureties are capturing new market segments; it's time the industry embraced diversity and expanded options for high-risk bonds.
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