Surety professionals across the globe know that the surety bonding profession is more than just selling a product to whomever is willing to buy it; it is all about relationships and education. In contract surety bonding, specifically, when a contractor is looking to earn bonding capacity, true surety professionals don’t sell the client on the price of the product. Surety professionals educate the client on the value of their expertise, because the value of that expertise far exceeds the premium dollars associated with the issuance of a surety bond. The value of this relationship should never be overlooked.
Joshua Etemadi, Sales Manager at Construction Bonds, Inc. a Division of Murray Securus, and Chair of the NASBP Small & Emerging Contractors Committee, knows this first hand. Etemadi said, “Oftentimes, we are contractors’ first point of contact when they start to research bonding and how to obtain it. In our experience, the most successful contractors value the surety professional’s expertise, while also recognizing the value a close relationship can bring, versus a more transactional approach without a personal relationship.”
Although arguably not as deep, a similar producer/client relationship exists when it comes to account-based commercial surety. Surety bond automation provides efficiencies, at the transactional level, which frees up the broker to focus his or her expertise on the larger, more complex, and relationship driven account-based business. What about those producers who intentionally focus on online transactional commercial surety though? Some have voiced concern over the transactional approach that some surety brokers have taken in the marketplace.
Those are the brokers that compete online by using search engine optimization (SEO) and pay-per-click (PPC) tactics to guide people on the web to visit, and make purchases from, one particular website over another. These marketing techniques, combined with the use of advanced commercial surety bond software, make it easy to find, apply for, purchase, and receive various types of commercial surety bonds. With consumers having the ability to acquire commercial surety products so easily, how does that impact the surety profession? People have referred to this online surety bond distribution model as “diminishing the value of the surety product.” Is that statement true? What does that even mean?
Contractually, a surety bond is a three-party agreement (the principal, the obligee, and the surety). There are, however, other individuals and companies who come into contact with the surety product. Let’s talk about some of those that might come into contact with a commercial surety bond, why they come into contact with it, how that individual or entity derives value from it, and where this diminishing of product value might occur, if at all, due to the transactional nature of this distribution model.
The Principal
Why is the principal--an individual or company--involved? This individual or company is a party to the agreement and is being required to post the bond. The principal is guaranteeing that contractual obligations to the obligee (defined below) will be fulfilled. This is the party that will likely be the one on the Internet searching for how to acquire a bond.
How does this individual or entity derive value from the surety product? The issuance of a surety bond is earned. It is not guaranteed, in most cases. Most of these transactions require that an underwriting process take place. The simple fact that a principal earned a bond is a selling point to prospective clients. When someone says, “I’m bonded,” it actually means something.
Assuming a transactional relationship is in place with the producer, how has the value of the surety product diminished? It hasn’t. Just because the bond was acquired in a time-efficient manner doesn’t mean that the principal didn’t qualify for it. Underwriting software ensures this. A human may not have processed the transaction, but a human did in fact build the risk model that recreated the manual steps taken to arrive at that same decision. No value has been lost.
The Surety
Why is the surety involved? This company provides a financial guarantee to the obligee, on behalf of the principal. Essentially, the surety is saying, “We’ve evaluated the principal’s ability to perform these obligations and are willing to guarantee that, if the principal defaults, we will absorb the hit, not the obligee.” Of course, the surety will seek to recover any losses from the principal, but at least the obligee doesn’t have to worry about it.
How does this entity derive value from the surety product? The surety generates premium revenue in exchange for taking on these risks. It’s actually quite simple. If the net premium dollars earned exceed the dollar value of the losses incurred, there is the potential for profit.
Assuming a transactional relationship is in place with the producer, how has the value of the surety product diminished? It hasn’t. As long as the risk model, created by a human being, is based upon sound underwriting practices for that particular type of risk, the net premium should exceed the losses incurred. The fact that there wasn’t a longstanding relationship in place, between the principal and the producer, doesn’t diminish the value of the product because the premium was still paid and losses were minimized.
The Obligee
Why is the obligee--an individual or company--involved? This individual or company is a party to the agreement and is the recipient of the principal’s primary obligations and the surety company’s secondary obligations.
How does this individual or entity derive value from the surety product? If the principal does not perform, a financially stable corporate surety company will step in.
Assuming a transactional relationship is in place with the producer, how has the value of the surety product diminished? It hasn’t. The obligee wants to ensure that the surety is going to step in, in case of a default. As long as the surety is a financially stable operation, there is very little risk. The transactional nature of how the bond was acquired doesn’t diminish any of the bond’s value.
The Producer/Broker
Why is the producer/broker involved? This individual is a not a party to the agreement, but is a licensed producer, who belongs to a licensed insurance agency. It is the producer’s responsibility to educate the principal about the surety bonding process and to then match the principal up with the surety, based on the risk at hand and a surety’s appetite for that particular risk.
How does this individual derive value from the surety product? In exchange for facilitating the transaction between the principal and the surety, the surety compensates the producer’s agency in the form of commission.
Assuming a transactional relationship is in place with the producer, how has the value of the surety product diminished? It hasn’t. The same value is received by the producer, regardless of the method used to acquire the customer. The education might take place on a website, but the education is still provided. The matching up of a principal and a surety still takes place as well. No value has been lost here either.
Surety Bond Claimant
Why is a surety bond claimant involved? This individual or company is not a party to the agreement, but makes a claim under the bond if the principal fails in its obligation to the claimant.
How does this individual or entity derive value from the surety product? The claimant expects to be made whole if the principal does not fulfill its obligations.
Assuming a transactional relationship is in place with the producer, how has the value of the surety product diminished? It hasn’t. Assuming a valid claim is submitted, the claimant is taken care of. Again, this is because a stable and reliable surety company was backing the bond. No value was lost here.
Based on everything here, it looks like the methods used to find, apply for, purchase, and acquire a surety bond does not diminish the value of the surety product itself, for any party involved throughout the lifecycle of the bond. Those who fear this method of transacting commercial surety business are, maybe, just not familiar with what goes into this process. They’re used to a completely manual, relationship driven transaction. It’s okay. That’s normal. But, stating that it diminishes the value of the surety product is like criticizing someone for using a calculator for performing mathematical calculations; just because it’s not done manually, doesn’t mean that the end result isn’t just as correct or meaningful. All parties involved, contractually or otherwise, derive the same value with automation in place as they would have without it.
According to Nick Newton, President of Newton Bonding and Chair of the NASBP Automation & Technology Committee, “While there’s nothing wrong with accepting SEO-generated leads, we need to be careful not to disrupt the important relationship between the surety and the broker. Sureties rely on brokers to be their eyes and ears in their respective geographic areas, so we want to ensure that we are still maintaining those relationships.”
Our industry recognizes that technology is becoming an increasingly important factor. That is why the NASBP created the Automation & Technology Committee. This is a committee comprised of surety professionals who are there to assist and educate others about the latest technologies available to the surety bond industry. Beyond education, they are one of the driving forces behind the push for innovative surety bond technologies. Don’t fear technology. Use it and embrace it. You won’t regret it.
The author of this article is Alexander J. Buckles, who is the President & CEO of The Bond Hub, Inc. He has been serving the technological needs of the surety bond industry for nearly a decade and continues to provide innovative software solutions to surety bond agencies, MGAs, and carriers. Buckles may be reached at abuckles@thebondhub.com or (800) 931-5373 X515.