Surety Bonds and The Rise of Bad Credit Programs

As the calendars rolled from the 20th to the 21st century the surety bond industry as a whole experienced some large scale changes. It was after several years of record breaking losses that forced many bonding companies to close down operations. Those sureties that were able to survive the soft market of the early millennium had some major changes to make. After a thorough review of their underwriting guidelines the industry shifted to become a much more conservative, leaving many applicants without the good credit unable to be bonded.

The fact of the matter is that many Americans do not have perfect credit, or anywhere near for that matter. One study (http://www.nationalscoreindex.com/ScoreNews_Archive_03.aspx) by Experian shows that the credit of an average American is 683. With a bond market that generally looks for a credit score of 650 or better, a large amount of the market was considered "un-bondable". Typically those with sub-par credit score would have to get an Irrevocable Letter of Credit from the bank, or obtain a bond by posting 100% collateral.

After a short a period of time where this was the norm, bad credit surety bond programs (http://www.bryantsuretybonds.com/bad_credit.htm) started to emerge. These programs were an alternative for those with bad credit that went against traditional suretyship. In these programs the surety would write for high risk commercial (sorry, this programs do not apply to contract bonds), but at much higher rates then typical bonds. Though this solution may have seamed very obvious to many, it should be noted that traditional surety underwriting is done with a 0% loss ratio. What this means is that unlike insurance, which many people mistake surety bonds for, there is no loss built into the premium of the bonds, hence only the best applicants traditionally are accepted.

The bonding companies that accept high risk applicants today are very few, though slowly new companies arise that are willing to write applicants using an insurance based philosophy. This increase in competition for the high risk market is good for the principle, as this competition has made rates more reasonable (slightly) and lowered certain requirements such as cash collateral, while adding new classes of business that are accepted as high risk.

So where does the future lie? This is perhaps the impossible question since very few would have predicted these High Risk Bonds from ever happening. Though many applicants may hope for lower rate, this does not appear to be in the cards as explained above in the 0% loss ratio mentality. The Bond market is very clear, it is separated into two camps, you are either in the standard market, or you are high risk. One thing that may occur in the future with increased competition is a scale of the high risk market. Perhaps those applicants with a history of a few collections may receive rates in the 8% -10% ranges, instead of just being lumped with applicants that have bankruptcies on their credit history.

The past few years have brought the bonds world into the high risk market. Through this time subtle changes have occurred to make the process easier on the applicants (no collateral-high risk). Eventually underwriters should start to define a cloudy area for middle ground rates for applicants that have poor credit sue to more minor infractions.

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