Why is it so Hard to Quote Surety Bonds?

Surety bonds can be difficult to quote, and many insurance agents have experienced this first hand. Whether it be the outdated technological platforms, extensive underwriting requirements, or general lack of guidance throughout the process, one thing is certain; obtaining a surety bond for your customer can be difficult if you don’t know what you’re doing. Surety bonds are a very niche insurance product, and most agents deal with them rarely, if at all. To make matters worse, most surety-related online platforms are extremely outdated, causing the bond application process to be arduous and confusing. In this week’s blog article, we expand on why surety bonds are hard to quote and provide insurance agents with solutions on how to simplify the process.

Outdated Technological Platforms

Picture this: Your customer contacts you requesting a performance bond for a construction project. You go to your favorite carrier’s website and start the bond application process, only to discover that you’ve been transported back to the 1970s and have to deal with a user interface that seems designed to be as confusing and hard to use as possible. Welcome to the world of surety bonds. The insurance industry has been investing heavily in the creation of user-friendly InsureTech platforms, so why have most carriers seemed to neglect surety bonds? This is a complicated question, with many different factors at play. To start, it’s important to understand that surety makes up only a small percentage of most carriers’ total top-line revenue. That’s not to say that surety bonds aren’t profitable, as they generate hundreds of millions of dollars in revenue each year. However, most carriers don’t view surety bonds as their bread and butter and usually classify them as “specialty products” outside of their normal purview. Case and point: Most carriers don’t view upgrading their surety platforms as a worthy investment, and would rather spend their funds on more traditional product lines, such as home and auto. Additionally, surety bonds often require original ink signed documents, making it difficult to create an effective online platform.

Extensive Underwriting Requirements

A major reason why surety bonds are difficult to quote is their extensive underwriting requirements. Unlike other types of insurance, surety bonds don’t protect the principal (the person buying the bond), but rather the obligee (the entity requiring the bond) from financial harm resulting from actions committed by the principal. During the underwriting process, surety companies must examine the likelihood that the principal will violate the bond provisions as well as their ability to repay the surety company for any claims. Dependent on the type and size of the bond, surety companies will oftentimes run personal credit checks on bond applicants, examine personal and business financial statements, and review their business experience to determine if the applicant qualifies. These various underwriting requirements certainly make the process of quoting a bond more difficult, as surety companies will examine aspects of the applicant’s financial and business history to determine the level of risk associated with issuing them a bond. Furthermore, given the level of financial underwriting at play, most carriers’ ability to automate underwriting is restricted to pass/fail criteria based on the applicant’s personal credit score.

Lack of Guidance

Let’s face it, surety bonds are confusing, and agents who don’t deal with them regularly have a hard time obtaining these bonds for their customers. To make matters worse, carriers don’t exactly hold agents’ hands, oftentimes leaving agents on their own to navigate the bond application process leading to agents spending inordinate amounts of time shopping quotes to obtain a single bond for their customer. To make matters worse, the commission received on a surety bond is hardly worth the countless hours spent navigating outdated platforms, obtaining financial statements from customers, and securing original ink signed documents. In situations such as these, most agents will deem surety bonds as a chore and choose to refer customers to other sources for bond coverage.

So What’s The Solution?

So far we’ve painted a pretty grim picture of surety bonds, and most agents are probably thinking that they don’t want to touch this product with a ten-foot pole. However, there is a solution that makes obtaining surety bonds easy, drastically reduces the time it takes to obtain bonding and allows agents to satisfy their customers’ needs without sacrificing their sanity. So what is this solution? Yup, you guessed it: Brokers. By using a wholesale-only broker for non-core product lines such as surety bonds, agents are able to efficiently obtain bonds for their customers in a fraction of the time it would take them to do so themselves. Many agents are apprehensive about using brokers, and we understand that apprehension. However, for a product as niche as surety bonds, agents are often faced with two choices; deal with the difficulties outlined in the above paragraphs, or easily obtain a bond in minutes by partnering with a wholesale-only broker. For help determining what factors to look for in a broker, check out our blog article on this topic located here.

Are all Surety Bonds Hard to Obtain?

No, some surety bonds are issued instantly and are subject to minimal (if any) underwriting requirements. Bonds that are considered relatively low risk can be obtained at a flat premium rate and without going through an intensive application process. So what makes bonds low risk? Well, bonds that have a low history of claims made against them and have a relatively low limit (below $25,000) will sometimes be issued instantly. However, each surety bond is unique, and there is no tried and true rule to determine whether a bond can be instantly issued. Additionally, surety companies will typically categorize bond applications in two different ways:

Account

Bonds issued on an account basis are going to involve more stringent underwriting requirements and an in-depth application process. Establishing an aggregate bonding line for a surety account requires the principal to set up a relationship with a surety company. When extending larger lines (at least $1,000,000), surety companies will want to familiarize themselves with the principal’s operations, financials, current work on hand, and expectations for future growth along with a myriad of other information prior to extending coverage.

Transactional

When surety bonds are referred to as “transactional”, what is typically being inferred is that it’s a one-and-done deal between the principal and the surety company. Given the reduced aggregate exposure, surety companies will often underwrite these requirements. Transactional bonds are oftentimes subject to a credit check but are still much easier to obtain than bonds issued on an account basis.

Surety bonds are good business for insurance agents, but only if they’re obtained efficiently. Because these bonds oftentimes require agents to have specialization in this product line (or access to brokers that do) and, given the scarcity of specialized surety bond brokers, “sticky” relationships are usually formed between agents and their customers. Additionally, surety bonds can serve as a gateway to other types of insurance, as principals will oftentimes need different types of liability insurance in conjunction with their bonds.