Underwriting Uncovered: The Definitive Guide to Surety Underwriting

Surety Bond Underwriting Explained

Regardless of the industry, whether you are a first-time bond applicant or shopping for your renewal quote, we want you to be prepared and knowledgeable about the underwriting process, which is why we’ve written this guide to teach you everything you need to know about surety underwriting.

The 3 Surety Bond Parties

Before diving into surety underwriting, here’s a refresher on the 3 parties involved in the surety bond process:

  • Obligee: the entity that requires the bond, often a government agency in charge of regulating or licensing an industry
  • Principal: the individual or business required by the obligee to obtain a bond
  • Surety: the insurance company that writes and financially backs the surety bond

For more information about surety bonds and why they are required, visit our informative What is a Surety Bond page.

What is surety underwriting?

Surety underwriting is a process performed by a qualified expert, known as an underwriter, to determine if a bond can be issued and how much an applicant will pay for their bond. Surety underwriters examine the bond application and the applicant’s financial history to determine the level of risk the surety company is taking in writing a bond.

How do surety and insurance underwriting compare?

Insurance underwriting is the process used to evaluate the risk of insuring people, businesses, or objects, such as a home or automobile, to determine if the insurance company should take the chance and provide coverage. You pay the insurance company a premium to cover you if a loss occurs. The premium you paid is calculated based on the idea that there will be losses sustained by the insurance company in settling a claim. For example, you pay your insurance company $100 a month for them to pay $10,000 if a tree falls on your house and damages the roof.

With surety underwriting, the underwriter is making the determination of whether to extend what can be viewed as a line of credit to a principal. The surety writes bonds with the assumption that the policy will not be used, and so the premium is based on the likelihood of a claim being made against the applicant’s bond, as well as the applicant’s ability to fully reimburse the surety. You pay the surety premium so that the company guarantees money up-front with the assurance they will be fully reimbursed if a loss occurs. So if you pay the surety company a $100 premium for your bond, you do not have to tie up $10,000 of your own capital to get a license or permit. However, you will still be on the hook for up to $10,000 of your own money if a valid claim is made against your bond.

Unlike insurance, where claims arise from accidents, claims against a surety bond are avoidable if the principal adheres to applicable rules and regulations.

Why do surety companies underwrite bonds?

The surety underwriting process is used when a bond is deemed risky by the surety company. Risk is the possibility of financial loss due to the potential negligent or damaging actions on the part of the principal. This classification of ‘risky’ often stems from the history of claims against the bond.

In construction, for example, surety companies look at the production and history of other contractors in the industry and try to predict the likelihood of a claim. A contractor license bond with a history of claims against it indicates contractors who needed this bond have historically failed to comply with the terms of the bond, resulting in numerous consumers filing claims. This causes the surety company to be particular when deciding who can obtain this bond, as they wish to minimize the possibility of claims. Individual rates may also be affected by a history of frequent claims within an industry.

Underwriting exceptions

For some bonds, the underwriting process isn’t required. Many professions such as notary publics, janitorial services, and insurance adjusters have premiums that are “pre-approved”. This means that all principals pay a set rate established by the surety company. These bonds are freely written by the surety without a credit check or review of financial history.

What do surety companies take into consideration when underwriting?

Aside from a bonds claim history outlined above, a surety underwriter will carefully review the applicant’s qualifications. The underwriter is looking to establish the applicant’s character, capacity, and capital during the underwriting process.

Honesty and integrity are the underwriter’s main focus when determining an applicant’s character. Possessing set moral principles and a determination to meet obligations proves to the underwriter that an applicant is of strong character. For example, an applicant knowingly providing false information on a bond application would bring their character into question.

Capacity refers to whether an applicant has the proper experience and can execute, with regards to financial limitations, on that knowledge. This is where an underwriter will look at an applicant’s expertise, education, industry stability, credit history, personnel, and any machinery or facilities owned. An applicant must be able to deliver on the guidelines of their bond and occupational work.

Capital examines the bond amount and conditions of the bond during underwriting. The higher the bond amount, the riskier it is to write. Bonds that are required for multiple years are also considered higher risk.

Another step in the underwriting process is to determine the terms and conditions that affect either the principal’s performance or the nature of the surety’s guarantee. These conditions and terms may be found in either the bond form or by reading the statutes referenced in the bond form or licensing laws. The terms of the bond can increase or decrease the risk level of the obligation to the principal and surety. 

For example, many bonds have language explicitly capping the aggregate limit of claims at the amount of the bond, meaning claims against a $10,000 surety bond cannot exceed $10,000, regardless of the number of claims made against the bond. However, certain bonds omit this language, leading the underwriter to consider the bond to be of greater risk because that $10,000 bond can receive multiple claims against it and the amount of liability can be far beyond the amount of the bond.

All of these factors are considered when determining the risk of an applicant and if a bond will be issued. Be prepared for an underwriter to look at financial payment, bankruptcy, lawsuit, or tax lien history.

How does the applicant’s information affect the bond quote?

While underwritten bonds may be riskier for surety companies to write, qualified applicants are typically quoted at 1-3% of the bond amount. However, an applicant’s personal information and history can have adverse effects when taken into consideration by the underwriter: the bond could be denied or the premium could be higher than expected.

An underwriter is more likely to deny an application if the applicant has a current or previous bankruptcy, lawsuit or lien. If the applicant has a history of not paying or falling behind on payments, such as loan payments, an underwriter may also be less likely to provide a bond quote.

However, an underwriter may decide that falling behind on a loan payment does not warrant denial. In this instance, the applicant may receive a quote, but the premium could be higher to account for the greater risk of approving an applicant with a history of late payments. This premium increase could also happen to applicants with poor credit, applicants needing a risky type of bond, or applicants looking to obtain a large bond amount.

Applicant information is reviewed again at renewal, where the premium may increase, decrease, or remain the same depending on changes to the applicant’s information. For example, a change in credit score might change the bond premium.

While all these factors may be taken into consideration by an underwriter, it is ultimately up to the training and expertise of underwriters to determine if the bond can be written and at what premium. Because no two applicants have the same information, bond quotes are expected to have varying premiums.

If the application is denied…

A surety company should let any applicant they deny know the reasons for this denial. Some reasons are fixable, while others are permanent to the point that no underwriter will approve your application. If you are worried your application may get denied, the only way you can find out for sure is by submitting a bond application.

When an application is denied or quoted at a high premium with SuretyBonds.com, your account manager will explain the factors that went into the decision. If applicants wish to contest the quote or denial, they can do so by providing proof of updated information. This proof can come in various forms such as cash verification, screenshots of bank accounts, bills paid, collections removed, liens removed, etc.

Providing this proof could lead to an underwriter reconsidering a denial, quoting a lower premium, or sticking with the original response. However, these outcomes vary from case to case.

If the quoted premium is not satisfactory…

You are not required to purchase a bond when you receive a quote from SuretyBonds.com, but it is unlikely you will find a lower premium elsewhere. SuretyBonds.com underwriters will send your application to multiple companies at once, ensuring you are getting the best available rate.

With our experience and reach, we identify the best markets for you immediately! These are the first companies we will send your application to, meaning you can have your quote in a matter of hours, if not minutes! To ensure a speedy turnaround, SuretyBonds.com works with ‘dedicated contacts’ at each surety. These contacts are dedicated specifically to SuretyBonds.com business to streamline our underwriting process.

Watch the video below to see how we get you the best quote with same-day approval and no additional fees.

The process of getting your quote from SuretyBonds.com usually takes less than 24 hours. However, slight delays are possible if an underwriter needs to follow up on information, send your application to another company, or request additional information.

Ready to get started?

Work with SuretyBonds.com today to take advantage of our free, no-obligation bond quotes, top-tier customer service, and our trackable shipping! At SuretyBonds.com, your quote is the price you pay. Unlike other companies, we don’t tack on any processing fees. Get started by submitting a free bond application today!

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About the Author

Rhaea Lehman
Rhaea is a 2021 graduate of the University of Missouri with a Bachelor in Communication and German. She is the content coordinator for the SuretyBonds.com marketing department and outreach team.