How much will a surety bond cost my customer? The cost (usually in the form of a one-time premium payment) for most surety bonds generally falls between 0.5% and 15% of the bond amount. If you do the math, that’s a pretty big spread. For example, a $20,000 bond could conceivably come in at a cost of anywhere between $100 and $3000.
Why such a large rate variation? Underwriters take into account a number of factors when determining premiums for surety bonds—all based on the risk (probability and severity of losses) to the insurance company. These factors include:
- Profession/Industry Risk – Your customer’s profession is an important factor in determining the bond rate. A business that performs high-risk services (e.g. mining or construction) typically pays a larger percentage of the bond amount as a premium than one that perform low-risk services (e.g. insurance adjustment or notary public).
- Bond Type Risk – Often closely correlated with profession/industry risk, underwriters will analyze the loss history of specific bonds or categories of bonds; those that have poor track records of losses (i.e. higher frequencies of claims) require higher premiums.
- Bond Coverage Risk – The language in the bond form and underlying statutes outlines the responsibilities of the principal (i.e. your customer). The more stringent the requirements the principal is obligated to meet, the higher the surety bond cost.
- Principal Risk – Last but not least, sureties assess the risks associated with the principal purchasing the bond (i.e. your customer). Because the principal is expected to reimburse the surety company for all losses, their credit history and financial stability are key in determining the final rate offered. Reputation and past performance, which speak to the likelihood of the principal to incur a claim, are also important indicators of overall principal risk.
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