Surety bonds work more like a form of credit than insurance with the surety only covering the claim cost for a short period of time until the business repays them in full. Surety bonds and insurance have one major thing in common: the underwriter examines the risk of issuing the policy in order to calculate applicant eligibility and the premium cost.
There are some differences between surety bond and insurance when it comes to the factors the underwriter will take into consideration when determining bond cost. Insurance premiums are calculated against the value of the asset being insured or size of the policy. Insurance also takes the risks involved into account, such as what type of activity the insured partakes in or type of business they conduct.
Bond premiums are calculated by the size and type of bond, and by the financial strength of the principal. There are a number of things that can drive up the cost of a bond , for example, certain types of bonds carry a higher risk factor, meaning they are more likely to be claimed against, this makes them more expensive.
People with strong credit scores and business financials are considered a lower risk and in turn pay lower premiums. While individuals with poor credit may pay a higher premium. The application process looks similar for surety bonds and insurance policies, at least in the outline. If there is more than one owner, each one may need to submit application materials.
There are also some important differences:. For most types of insurance, the application and underwriting process is less rigorous than for surety bonds.
Applicants will need, in most cases, to provide less documentation, and a credit check may not be necessary. A surety agency will always run a credit check on any bond seeker. For certain types of bonds, they may also require extensive financial documentation.
A good surety agency will work to streamline the process and minimize the burden on applicants. Nonetheless, expect obtaining a surety bond to be more involved than obtaining an insurance policy. Losses Insurance: Losses are expected and insurance rates are adjusted to cover losses depending on many factors. Join our newsletter. Enter your email to receive our occasional email. This field is for validation purposes and should be left unchanged. Join Now. Call, email or stop by.
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We also use third-party cookies that help us analyze and understand how you use this website. Yes, there are exceptions such as states requiring car insurance or banks requiring homeowners insurance. But in general, you have the option of whether or not you want to transfer the risk of unforeseen, unpredictable bad things happening to someone else.
If you decide to get an insurance policy you also have the option of the amount of risk to transfer. This affects the premium charged so you also have some control over what you pay for insurance policies. No one gets a surety bond because they want to. You get a surety bond because someone is making you get it in order to do business with them. The risk transfer with surety bonds is all or nothing. So the premium charged is set by the surety carrier based on the underwriting.
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