Many children grow up playing with building blocks and Tonka trucks. Some dream of becoming contractors, and a few actually do. Still, hiring young talent is a significant challenge throughout the construction industry. Finding interested candidates for surety bond underwriting is even more challenging. Does anyone grow up thinking they want to be a surety underwriter? What child would even know that this job exists? 

Surety underwriters are a rare breed, a somewhat endangered species that is slowly being repopulated as surety and insurance firms rededicate themselves to recruitment and training. And they can be hard to spot. Often, contractors believe their agent or bond producer is their surety underwriter. This is not the case. 

The surety underwriter decides whether to accept a risk—not a task to be taken lightly. Contractors know all about taking risks. It is truly amazing how much risk contractors take on a daily basis for a seemingly modest return. Considering all the things that could possibly go wrong in a construction project and the lengthy contracts and specifications involved, it can be downright paralyzing. Likewise, for the surety underwriter—which is, in fact, guaranteeing the contractor’s work—a tremendous amount of trust is involved.

No Margin for Error
Surety bond premiums generally run in the 0.5 percent to 3 percent range of the total contract price. Unlike insurance premiums, they are not designed to cover losses and they do not typically fluctuate every year. Surety rates have remained very consistent since the mid-1980s. On average, let’s say the blended rate is 1.5 percent, or $15,000, for a $1 million bond. One bad decision resulting in a full penalty bond loss would negate 66 good decisions. In other words, surety bond underwriters often have to be right 98.5 percent of the time just to break even. There is literally no margin for error, and expectations are always high.

Surety underwriters must adhere to company underwriting guidelines, but they also are charged with growing their book of business, building and maintaining agency relationships, and avoiding losses. It is fairly common in the industry to get annual bonuses based on production and loss results.  

According to the Surety & Fidelity Association of America, the surety industry paid out more than $1 billion last year, and the frequency of surety claims is trending up. When a contractor fails, the underwriter feels it as well. Surety underwriting is a high-risk job, and it can be very stressful. In Major League Baseball, Ty Cobb holds the all-time record with a .366 batting average. A surety underwriter batting .985 may not qualify for his or her bonus and may not even keep a job. It is not an industry for the weak and the weary.

While nearly 6,000 insurance companies and more than 650,000 construction firms exist throughout the United States, there are only about 100 surety companies. It is a niche industry, where everybody knows everybody and there is little room to hide. 

Brutally Honest Analysis
How can surety underwriters be sure? It is their job to ask a lot of questions and take educated risks. They need to be good listeners and continuous learners. They may need to be brutally honest and confront potential issues or concerns. A good underwriter will not tell you how to run your business. They will explain how the underwriting process works and help you develop your bonding capacity. The more comfortable an underwriter can get with a contractor’s financial capabilities and business plan, the more he or she will be willing to stretch on job size and program requests. 

A surety underwriter is more of a financial analyst than a construction expert. The job itself is somewhat akin to banking, although the surety company is not usually a secured creditor. Underwriters typically think in terms of numbers and percentages, profit margins and ratios, liquidity and leverage, over/under-billings and over-90-day-old receivables. They need to be able to read contracts and understand the underlying risks in the jobs they are guaranteeing. Underwriters must understand the contractor’s financial and job performance history and be able to accurately predict the future. They need to be part psychic and part psychoanalyst. 

There is also a human element to underwriting. It is a relationship business that cannot be fully replaced by computer software and automation. Annual account meetings are an important part of the process. It would be a disservice to judge a contractor only by what it looks like on paper. A face-to-face meeting is invaluable for all parties involved. 

Underwriters have growth goals, too, as well as pressure from their agents and customers. Sometimes they are the good guy helping a contractor to grow its business with tremendous support; sometimes they are the bad guy delivering the tough decision. One day they are Clark Kent; the next day they are Lex Luthor. More often, they are Hawley Griffin, a.k.a. The Invisible Man. They have to be transparent, but also thick-skinned and able to say no. 

Sometimes a contractor may wonder how one of its competitors was able to get a bond. The truth is, not all contractors should qualify. The market is very competitive right now, so it has never been easier to obtain a bond. That doesn’t mean these conditions will last.  

No Surprises
For contractors working in the public sector, a strong surety relationship is their lifeline and should be viewed with utmost importance. Being ready and willing to answer the underwriter’s questions will only help him or her understand the business better and be prepared to provide support when needed. The underwriter’s experience and comfort level is invaluable when a contractor goes through the inevitable tough times or has difficulties on a specific job. Nobody likes surprises, especially underwriters. Trends and issues should be addressed early on, and communication is paramount. 

Don’t be afraid to open up to the surety underwriter. After all, underwriters are just trying to help contractors succeed. And if this business doesn’t work out, the underwriter can always fall back on a career in major league baseball, or better yet, with the National Weather Service, where the expectations of being accurate are far less than 98.5 percent.


Scott Paice is vice president of surety for FCCI Insurance Group, Sarasota, Fla. For more information, email spaice@fcc-group.com.