Many surety bond buyers are not clear on why the price of a surety bond can vary so much across applicants and bond types. To provide some clarity on the subject, it helps to consider all the factors involved in determining the ultimate cost you will pay for the bond. Following are the key factors that drive surety bond prices and specifics on how each component affects the price you will pay for the bond.
1. Type of Surety Bond
One of the first things that impacts a bond price is the type of surety bond needed. There are thousands of different types of surety bond requirements mandated by all fifty states and various local cities, counties, courts and other third parties across the country. In short, most surety bonds will cost in the range of 0.5% to 5.0% of the coverage amount required but how the surety gets to the actual price is far more involved. Each surety bond guarantees a unique risk associated with a particular business license, job contract, legal arrangement or other obligation undertaken by the bonded individual or entity.
2. Size of the Surety Bond
Every surety bond has a set limit of liability, also referred to as the coverage amount or penalty of the bond. The limit of liability to the surety company backing the bond can vary widely from $1,000 to multi-millions of dollars for large construction project or probate court matter. As you might expect, the amount of financial risk undertaken by the surety company impacts the ultimate price of the surety bond. It’s also important to mention that the coverage amount of the bond is usually set by the obligee (entity requiring the bond) based on the obligation of the bond and this amount is usually not subject to change.
3. Who is Requiring the Surety Bond
Similar to the type and size of the surety bond, the requiring entity plays an important role in the price of the surety bond because it reflects the underlying risk of the bond to the surety. For example, a surety bond mandated by a tax authority that is authorized to file a claim against a bond to reimburse the state for unpaid taxes or penalties will likely result in higher risk and bond prices for the buyer than another bond filed with a licensing authority that only has authority to file a claim on the bond for compliance reasons. In other words, surety bonds that involve a “strict financial guarantee” are almost always more expensive than bonds that help ensure compliance with rules, regulations or applicable state laws.
4. Term of the Surety Bond
Most surety bonds are set to be active and in force for an initial term of one year and are priced accordingly. However, many surety companies offer extended terms such as a two, three, or four-year terms. While extended terms are often offered at discounted rates purchased for multiple years, these bonds are still more expensive because the surety company is exposed to the risk for a longer period of time.
5. Financial Wherewithal of the Applicant
Another factor that plays into surety bond prices is the qualification of the specific applicant. Surety bond underwriters review a range of items to qualify and categorize applicants based on risk of loss. Business and personal credit scores, work history, experience, net worth and several other criteria may be reviewed during the application process to help set a price for the bond. More underwriting is typically required for larger bond obligations and those with more risk. On the other end of the spectrum, there are several small low risk bonds that sureties will offer at set prices without requiring any personal information.
6. Availability of Bond Financing
The premium for most bonds must be paid upfront prior to the bond being issued and going into force. However, some bonds are eligible for financing, effectively spreading out the cost of the bond over time. There are typically interest and fee costs associated with bond financing so the actual bond cost may go up slightly. That said, the option to pay for the bond through installments over the term of the bond is an attractive option for many bond buyers.
7. Provider of the Surety Bond
Each authorized surety company files its own competitive rates in each state where the surety operates. The rate filing process is complicated but generally allows prices to be set based on the underlying risk of the bond type, the credit profile of the applicant, and the operating costs for the surety. What this means for surety buyers is that it makes sense to shop around for the best price in the market. One of the easiest ways to shop is to find a broker that will do the shopping for you. Many large national brokers like Surety Bonds Direct operate by working with numerous A-rated, Treasury Listed surety companies and strive to earn business by shopping around with numerous surety partners to get the best price for each customer’s unique situation.
Hopefully this article has helped provide some more clarity regarding the world of surety bonds and why your bond price may be so different from a previous bond or what your neighbor may have paid for her surety bond. Call us at 800-608-9950 to speak with a bond specialist and get a firm quote for your bond.