SURETY’S EVOLUTION

Not taking the surety bond market seriously

is a costly mistake many agents and brokers make

By Lori Widmer

“Surety is a very hot place to be right now,” says Aaron Steffey. His enthusiasm for the market is understandable: Steffey is co-founder and co-CEO of Propeller Bonds, a Philadelphia-based insurtech company operating as an MGA. Launched in June 2020, the firm provides an online platform for instant underwriting and issuance of surety bonds.

Steffey’s enthusiasm is not unwarranted. Surety loss ratios stood below 20% in 2021, according to a GBQ Partners market update. A WTW report describes surety profitability as strong, with revenue in 2021 growing by over 7.5%. That’s bringing new players into the market, with WTW reporting three new entrants in 2022. The National Association of Surety Bond Producers shows nearly uniform confidence, with 96% of executives saying they did not plan to tighten underwriting in the near term.

The news comes as no surprise to Steffey. “Underwriting profits are and have always been historically very good in surety,” he observes. And despite what he says are currently higher loss ratios and underwriting losses, he sees little wavering from the industry stalwarts.

“More are inclined to double down on surety, because it’s such a profitable market.”

Such market enthusiasm could be attributed to how surety weathered the pandemic maelstrom. Despite a resurgence of construction projects, for example, surety loss ratios declined, as projects ramped up again. And yet, Steffey says, the industry is largely ignored by agents and brokers.

He attributes a misguided perception that the surety bond market delivers a low commission return on investment when compared to other lines of business. He disagrees. “It’s high-commission, low-service work.”

Economic impacts

While there is much business to be had within the surety bond market, there are plenty of factors putting pressure on bond buyers. Steffey says that increased labor costs have contributed to driving up the total project costs and thus also increasing the bond costs. Add to that the slowdown in projects in the early stages of the pandemic.

“The backlog dried up and then they had to take on debt—maybe even credit card debt—to ride out the work stoppage,” he explains. That situation could be making it difficult for some bond buyers to qualify for surety bond cover.

“I would say that it’s been affected some by the current economy, but a lot of it is still the after-effects of COVID,” he adds.

COVID did not dampen the need for surety bonds. While the slowdown did impact the market somewhat, buyers cannot work without bonds.

However, too often a buyer does not know exactly how the bond works and what is being purchased. “Buyers misunderstand what surety bonds are,” says Steffey. “Some require an indemnity agreement. Such indemnity agreements state that if you break the law or don’t finish a job or break the terms of the bond, the insurance carrier will step in and pay the claim. But they have the right to go back after you, as you have signed and indemnified the bond.”

Steffey says that bonds valued at below $50,000 typically do not require indemnity clauses; those valued at $50,000 or greater come with indemnity agreements. While the buyer is paying a premium to the carrier, they are still expected to be covering any losses they cause. The bond is there to ensure that the client will be remediated. “It’s not just a two-party agreement,” he explains.

“[A bond is] not just a two-party agreement. Educate your customers on what they’re signing.”

—Aaron Steffey
Co-Founder and Co-CEO
Propeller Bonds

His advice to agents and brokers is simple: “Educate your customers on what they’re signing.”

Automating surety

He also advises agents and brokers to take on more surety bond business, a move made easier with the automation of the bond process. Applying technology to the workload, Steffey says, helps commission come a bit more easily. So does adding a surety division to one’s organization.

Propeller, he says, acts as “a bolt-on surety bond department to over 3,000 agencies nationally.” This allows agents and brokers of all sizes the chance to get into the surety market quickly, without the financial outlay needed to hire a department or producer to handle the additional product workload.

The emergence of technology in the surety space is in part thanks to the pandemic. While the COVID-era work slowdowns did not precipitate automation, Steffey says it was a definite accelerant. Automation lets organizations build a more robust bond business. “For small agents and brokers, we are their full-on surety department. But we also work with many of the top brokers in the country.”

Digitizing the process adds a quickness that moves the industry forward, Steffey adds. On the horizon, he sees a strong push coming to streamline issuance and billing via API, or application programming interface. In other words, online sales and delivery. Propeller is playing a role in the evolution.

“We’re using API to be able to call a rate and allow a customer to buy surety bonds within their typical payment process of say, commercial insurance, or when they’re buying GL, [customers can also] click a button to add a surety bond.”

He says the process works in two ways. “One, it is automating the bond form.” That in itself is no small task. The bond form needs to be signed differently for every city, every state, every government agency or municipality. With thousands of bond forms in just as many jurisdictions, the process can be tedious and time-consuming.

Automation allows customer application information to be entered into the system and then mapped to the appropriate bond form. Propeller, he says, houses a library of tens of thousands of bonds, speeding the process. “The bond forms come electronically signed and sealed and ready to be delivered,” he says.

The second automation advantage: improved billing. In surety, he says, that was a big deal. Bringing more cohesion around credit card, direct bill and auto renewals has boosted billing function significantly, he adds.

While commissions are typically not high, Steffey says that automation reduces the effort, allowing agents and brokers to generate a bond issuance within minutes and without the legwork traditionally involved in getting forms, getting information gathered, and getting the bond issued. Such efficiency comes in the form of outsourced bond management and even internal bond management. Propeller, says Steffey, can provide both services, depending on the size and needs of the customer.

Leading with bonds

The need for greater efficiencies, he says, has led to bonds becoming an unlikely profit center. “I encourage a lot of our agents to actually lead [the client conversation] with surety and more so as a lead generation opportunity.”

That kind of approach can work well to introduce an agency or brokerage to a new client—a foot in the door, if you will, and a way to sell the value of the agency. “I find it to be a nice back-door way into accounts,” he explains. “If you can help a contractor or construction company with their surety bond last minute, that’s a great way to sell the broader account.”

As an MGA, Propeller’s automation is a free product for agents and brokers. Plus, Steffey says, it gives agents and brokers access to markets and technology that they wouldn’t otherwise be able to reach. “The agents sign up with us and, within five minutes, we’ve delivered our product with their branding and their logo, and they’re off and running and bonding.”

The need for the surety bond itself is driving customers to the agents’ doors. “A lot of agents and brokers ignore that,” Steffey explains. “Do that at your own risk, because these companies are going to get their bonds from somewhere,” and the agent writing that bond business is in a great position to upsell.

As the construction market heats up, the bond market is doing the same. Savvy agents and brokers, says Steffey, will look at ways to win new business through a renewed focus on surety. With an automated process, surety could well become an agent’s or broker’s best marketing tool.

The author

Lori Widmer is a Philadelphia-based writer and editor who specializes in insurance and risk management.