What you need to know:
Surety Underwriting Process
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What you need to know:
Surety Underwriting Process
What you need to know
Surety Underwriting Process In the process of obtaining surety bonds, you may come across the underwriting process
process.
is
quite
This
intimidating,
especially to new surety bond applicants. Here, we provide a brief overview on: o
How surety bond underwriters identify risks
o
Understand terms and conditions
o
Evaluate the Principal’s three C’s
This
The Surety Underwriting Process
outline
information
the
also
includes
surety
bond
underwriters require to complete an exhaustive analysis of the Principal’s capacity to perform.
Surety Underwriting Process
Surety bond underwriters perform these roles:
1
Identify risks
Once an applicant (Principal) has completed a
Surety underwriters have the authority to select
bond application form and sent it to the Surety
which risks their bond company will approve or
Company, an underwriter will initially need to
reject. They will determine the level of risk
determine the bonding risks involved.
involved and approval by:
The obligations of the Surety and Principal are
o
Assessing the actual obligation
“joint and several,� meaning that it allows the
o
Considering the agreement, regulations, and rules written on the bond form,
Obligee to recover from the Surety, Principal, or both financially.
o
Examining the Principal’s capacity to perform
Surety Underwriting Process
Surety bond underwriters perform these roles:
2
Understand terms and conditions
The next step in the underwriting process is to understand the terms and conditions that affect either the Principal’s performance, the bond itself, or the
Surety’s guarantee. These conditions and terms are found in the bond form, specific regulations, statutes, and ordinances. Also, they can increase or reduce the Surety and Principal’s obligation risk levels.
Surety Underwriting Process
Surety bond underwriters perform these roles:
3
Three C’s of underwriting
Once a surety underwriter has identified the potential risks and became familiar with the terms and conditions of the bond, he or she can begin evaluating the Principal’s ability to perform the obligation
by
looking
into
the
Three
C’s
of
Underwriting. The Surety industry uses “the three C’s of underwriting”
in
determining
the
Principal’s
qualifications: Character, Capacity, and Capital.
Surety Underwriting Process
Three C’s of Underwriting
CHARACTER
CAPACITY
CAPITAL
A surety underwriter would want to establish a
It means the Principal’s ability to perform the
This defines the financial capacity of the Principal to
bonding relationship with someone who has good
obligations described in the underlying contract. The
fund their operations and their ability to financially
character. Nobody intends to work with a dishonest
Principal’s capacity may sometimes be based on
respond in case they are unable to perform in
and deceitful character, which will cause losses at
his/her own experience, knowledge, and expertise, or
keeping up with the terms and conditions of the
some point.
that of his/her staff/employees.
contract.
Surety Underwriting Process
What does an Underwriting Authority do? Only surety bond companies can perform or grant underwriting authority. Often, underwriters are Certified CPCUs (Chartered Property Casualty Underwriters). Once they have identified risks, understood the bond terms and conditions, and evaluated the Principal’s three C’s, they will review the information submitted to them. This process could make or break a Principal’s capacity to be issued a surety bond.
EXPERTISE EXPERIENCE CREDIT HISTORY
LONG-TERM STABILITY EQUIPMENT MANAGEMENT
Surety Underwriting Process
What does an Underwriting Authority do?
EXPERTISE
1
EXPERIENCE
2
3
CREDIT HISTORY
Established companies, particularly long-time
It is a well-published fact that new businesses
Sureties will be more predisposed to write
construction firms, have already proven their
fail at a high rate. Issuing a bond with a high
bonds for businesses that have a good credit
ability to perform their obligations and make
degree of risk or a long-term obligation for a
standing.
profits. They make better credit risks for the
new entity requires a close analysis of the
outstanding condition. If you demonstrate good
Surety. However, companies that are just
experience of the owners.
pay records, zero loans, and excellent capital,
Your
financials
should
be
in
venturing into new products and services, such
this evidence guarantees the Surety that you
as start-ups or small businesses like car wash
will also protect their “credit.�
providers, have a certain high degree of risk for the Surety.
Surety Underwriting Process
What does an Underwriting Authority do?
LONG-TERM STABILITY
4
EQUIPMENT
5
MANAGEMENT
6
Your business must not only be presently
A surety underwriter will not only look at your
One of the causes of business failures is having
successful, but it should also prove that it can
existing equipment and facilities that support
poor management. A surety underwriter may
thrive and survive with long-term financing to
your current operations; you must also have a
also assess your working personnel /staff
continue supporting your business operations.
concrete plan to maintain, replace, and update
/employees and do some credit/background
obsolete equipment and facilities to produce
check.
products and services for the long haul.
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