Agents with clients who need license and permit bonds, miscellaneous bonds, court bonds, or any number of bonds classified as “commercial,” should think twice about letting this business go to a competitor. Commercial surety is a great supplemental product that can be added to an agent’s portfolio to meet the needs of clients and further cement a customer relationship.
Too many agents view surety as a narrow specialty best left to larger firms. But selling commercial surety isn’t difficult, and there are lots of surety companies that would jump to be an agent partner. All it takes is a phone call to a bond representative at one of the carriers an agent already does business with.
A Good Market to Be In
Why is commercial surety such a good market to be in right now?
Here’s just a few reasons:
- Commercial surety is universal to all industries. For many occupations and trades, a license and permit bond is required to do business. There are also bonds tailored to specific industries and professions. That means there are clients in every agent’s book of business that need bonds.
- The commercial surety business is hyper-competitive. The market has been quite soft for many years, which means surety companies want business. Agents shouldn’t have any problem finding a surety company to meet a clients’ bonding needs.
- Many commercial surety bonds are highly automatable. License and permit bonds, which make up nearly half the commercial surety market, can often be written with very little underwriting and issued the same day. The ease of writing these bonds has improved markedly with the advent of electronic applications and signatures.
- Commercial surety commissions are lucrative. Commissions start at 25-30% and often go higher. For agents, that’s a high rate of return on business that doesn’t require a huge investment of their time.
- Many commercial surety bonds renew automatically, providing a steady stream of income for an agent year after year.
The Difference Between Surety & Insurance
There are a few things agents need to know about surety if they haven’t sold it before. One is the unique aspect of a surety contract. Surety is an agreement between three subjects: the bond principal (theclient), the obligee (a government entity) and the surety (the bond underwriter). A surety bond is a guarantee on the part of the surety to make good on a promise the client has made.
The surety company must make the obligee whole if the bond principal does not perform as promised, but the principal is responsible for the losses. The surety is entitled to repayment from the principal for a claim, and will often confirm and bolster this right by requiring principals to sign an indemnity agreement saying they will reimburse the surety.
Surety is much like an extension of bank credit. The surety is providing the client the benefit of its credit standing. Depending on the type of bond, sureties will prequalify their applicants, which may include reviewing the principal’s financials, net worth and experience. The surety wants to minimize its exposure to claims.
As a result, commercial surety losses are quite low. In fact, they have been in the single digits for about 10 years now. You’d have to go back to the Great Recession of 2007–2009 to find losses above 10%.
Transactional vs. Account Surety
Commercial surety business can be divided into two categories: transactional and account.
- Transactional bonds can often be written easily and quickly, sometimes requiring little if any underwriting.
- Account underwriting requires a review of the client’s financials and experience. We call this account business because the risk is being assessed at the principal level. The agent is facilitating a relationship between the surety and their client, and the client is establishing bond credit that can be used as needed — in essence, setting up an account.
As you might imagine, account business has greater stickiness. Clients seldom seek to change sureties once they’ve secured the bond capacity they need. Agents can easily build a book of business that provides recurring commission income.
Overall, the commercial surety sector has weathered the pandemic fairly well, although certain industries such as hospitality, travel and entertainment have suffered downturns. But there is ample surety capacity, and the industry remains quite competitive.
It remains to be seen whether losses will increase due to the pandemic or if sureties will tighten their underwriting requirements. Many industry observers believe we are due for a reset of sorts, with a return to more conventional terms and conditions.
One favorable consequence of the pandemic is the wider acceptance of electronic bonds. Surety has been slow to modernize in this area, and many obligees still require paper bonds that are signed and sealed. During the pandemic, a number of governments agreed to accept electronic signatures and seals. Hopefully, more obligees will move in this direction.
The future looks bright for commercial surety bonds, and there are many opportunities for agents. Find a surety partner you can work with, one who can guide you through the process and has a presence in your markets. You will provide a helpful service for your clients and create additional, renewable income for your agency.
Kathryn Truman is commercial surety leader at Westfield in Westfield, Ohio, where she oversees the company’s commercial surety business. Westfield, a leading property-casualty carrier founded in 1848, ranks 22nd among surety providers in the U.S. Prior to her current position, Truman served as surety services and governance leader, and senior surety claims counsel.