What Does the Surety Underwriting Process Look Like?

Before you can bid on lucrative projects as a contractor, you often need to obtain a surety bond. This guarantees you’ll fulfill your obligations to the client and other relevant stakeholders within a given period and in accordance with industry standards.

So what is surety underwriting? Essentially, it’s the process through which a surety bond provider vets you and your business before deciding to issue a bond. It’s also different from insurance underwriting, which you may already be familiar with.

In this article, we’ll discuss what you can expect from surety underwriters and how their assessments affect your premiums when obtaining a bond.

What Is Surety Underwriting?

Through the process of surety bond underwriting, a surety company evaluates the risk level of a principal before approving the bond application.

These companies want to issue surety bonds to principals who:

• Have a low risk of a claim made against them and/or their business
• Have sufficient capital to reimburse the surety provider if necessary

→ Related resource: The Cost of Surety Bonds in Ontario

The Surety Underwriting Process

Once an application has been filed, surety underwriters will begin the process of reviewing relevant information about the principal. They will be assessing:

1. The principal’s professional capabilities, especially as they pertain to their ability to follow through on their contractual obligations.
2. The principal’s financial stability and their access to readily available funds.
3. The principal’s personal character, as surety underwriters are looking for someone who has proven themselves to be law-abiding and trustworthy.

Other things a surety underwriter may look into include the industry or bond type and cost. After examining their financial statements and history in-depth, the surety company will issue a bond premium quote based on their surety underwriters’ risk assessment. This typically takes a few days to a few weeks, depending on the above factors.

What Do Surety Underwriters Look For?

As mentioned previously, the surety bond underwriting process entails assessing the applicant's risk factors. These can include:

• Bad or low credit score
• Having previously filed for bankruptcy
• Having been charged with a felony conviction(s)
• Insufficient experience in the industry
• Outstanding debt
• Bond claim history, if there is any
• Disciplinary actions, suspensions, or license revocations made against the principal
• Lawsuits filed against the principal
• Liens for unpaid taxes on the principal

Any of these factors can severely impact your surety bond premiums.

A low credit score is particularly important when it comes to underwriting for surety bonds. This is because surety bonds are similar to having a line of credit, which means that low credit scores could increase surety bond premiums.

The surety underwriter will also examine the terms of the bond during the underwriting process. Seeking the following bonds will increase your risk level as a principal:

• Those that frequently have claims filed against them
• Those that include a substantial penalty sum
• Those that incorporate multi-year terms
• Those in which the language used can leave the surety company liable for an amount that exceeds the penalty sum

The surety underwriter will then calculate a premium and provide the principal with an estimate based on the risk factors assessed.

Surety Bond Underwriting vs. Insurance Underwriting

The main difference between surety bond underwriting and insurance underwriting is that an insurance provider expects claims to be made on its policies.

Most insurance policies cover events outside of the policyholder’s control and are issued with the expectation that an unforeseen incident can and will arise. As such, the insurance provider factors in the possibility of a claim when determining the price of a policy.

Meanwhile, surety bond agencies don’t anticipate claims made against the bond. This also means that in the underwriting process, those who have been determined as “low-risk” become ideal clients because they present minimal risk of a claim.

With insurance, policyholders are the ones paying for deductibles. On the other hand, if a claim is made against a surety bond, principals are responsible for reimbursing surety companies for the money paid to the claimant.

This is why it’s crucial to remember that surety bonds are binding financial and contractual obligations. You have to set contingencies for repaying the surety bond broker in case a claim is filed against you—the responsibility falls on you.

Surety Bonds Without Underwriting

There are surety bonds that don’t require an underwriting process.

These include car title bonds, specific contractor license bonds, notary public bonds, and public insurance adjuster bonds. These types of surety bonds are statistically considered low-risk when it comes to potential bond claims, often being available to purchase “pre-approved” from reputable surety companies.

Partner With a Reputable Surety Company to Secure More Bonds

The surety bond underwriting process can be daunting, especially if it’s your first time applying for one. You can, however, improve your chances of being approved by knowing what to expect. Working with a great surety company helps, too.

KASE Insurance is a leading insurance and surety brokerage in the Greater Toronto Area. Named one of Canada’s top-growing companies two years in a row, we know what it takes to thrive in today’s economy. For contractors and those working in the construction industry, we’ve got you covered with personalized insurance solutions and surety bonds that will protect and propel your business forward.

You can trust our team of experienced surety underwriters to provide you with a fair and straightforward assessment. Contact us today or get started with a quote!