It’s a tale as old as time.
An insured is in need of a surety bond, and when they go to fill out an application, they are prompted to input their Social Security number. Confused, they reach out to their insurance agent for clarification on why this information is required.
“Why do I need to provide my Social Security number on an insurance application?”, they ask their agent. Now, unless the agent is attuned to the intricacies of surety bond underwriting, their answer will probably be, “Because the insurance company requires it.” Unsatisfied with this answer, the insured still provides this information (because they need the bond), but the question lingers in both the minds of the agent and their customer.
Alternatively, the insured may enter a state of blind fury, immune to rationality and reason, and abandon the application process altogether. A few days later, the insured admits defeat and begrudgingly provides the information, although dissatisfied with the entire process.
We see variations of these conversations every day, and to help your agency better explain this unique requirement to your customers, we’ve put together this article answering the age-old question of why surety companies sometimes ask for Social Security numbers.
A Process Unlike Any Other
To be fair, wondering why the surety company needs a Social Security number is entirely reasonable. Traditional insurance products don’t require applicants to provide this information, so what makes surety bonds so special?
A lot, actually.
Unlike other types of insurance, surety bonds (excluding fidelity bonds) do not protect the person who purchases the bond but rather the person or entity requiring it. For example, auto dealers need to obtain a bond as a prerequisite to receiving a business license. However, the license bond does not protect the dealer but rather the state Department of Motor Vehicles and the dealer’s customers. Additionally, and this point is key, if a claim is made against the dealer’s bond they are required to repay the surety company for all claims and claims handling expenses (a provision known as indemnification).
All surety bonds are indemnified, meaning all principals (persons who purchase a bond) must repay the surety company for valid claims. Claims made against surety bonds are completely avoidable and only occur if the principal commits fraud or engages in unethical conduct.
In essence, think of surety bonds as a line of credit that the principal must pay when and if it is used.
See also: Commercial Underwriting: Risk Factors That Matter
It’s All About the Risk
The unique nature of surety bonds compared with other types of insurance requires a similarly unique underwriting process. When underwriters determine whether to issue a bond, they are considering two factors:
1. The likelihood the principal will repay the surety company for valid claims
2. The likelihood that a valid claim will occur
Aside from a review of a person’s financial statements (which surety companies do for high-risk bonds), what better way is there to determine the likelihood of getting repaid than to examine the applicant’s credit history? Unless you know the person dearly, the answer is there isn’t one.
Surety companies run soft credit checks (that don’t affect the applicant’s credit) on applicants to assess the risk that the applicant won’t repay them in the event a valid claim occurs.
The Moment You’ve Been Waiting For
To run a credit check, surety companies need the applicant’s Social Security number. This is because credit bureaus use individuals’ Social Security numbers when generating the report as a means to identify the individual and their loan/payment history.
And there you have it, the long-awaited answer to the question that’s been eating at the curiosity of insurance agents and their customers since time immemorial. Surety companies don’t require Social Security numbers simply because they feel like it, but rather because they need to run credit checks on applicants to determine if they qualify for the requested bond.
See also: The Future of Insurance Fraud
What About the Second Point?
To determine the likelihood that a claim will occur, surety companies will:
1. Consider the claims history of the bond as a whole
2. Examine whether the applicant has had any valid claims made against a previous bond
3. Determine the applicant’s years in business
Those factors help surety companies make informed decisions on whether issuing an applicant’s bond will result in claims. This is why your customers oftentimes must input their years in business on bond applications (so the surety company has proof they are reputable), and it also explains why the same applicant may pay more for the same bond type in different jurisdictions. (If one jurisdiction has a history of high bond claims, the surety company will consider the bond riskier.)
Surety companies consider the factors outlined in this article when determining an applicant’s premium rate and eligibility. Applicants with good credit and multiple years of business experience often get the best rates, while those who don’t typically pay higher rates or get declined altogether.
Why Do Some Bonds Not Require Credit Checks?
Certain surety bonds are considered so low-risk that surety companies are able to issue them to all applicants at the same price without conducting any underwriting. These bonds are categorized as “instant issue,” and the process for providing them is:
1. Your customer submits an application
2. The carrier/broker copies this information onto the bond form
Whenever you or your customers are not required to provide a Social Security number, then the bond being applied for is an instant-issue bond that has no underwriting criteria.
The Truth of It All
What often happens within the surety industry is companies advertise their ability to write these instant-issue bonds as a sign of their technological prowess and innovative solutions.
What these companies don’t tell you is that whenever you or your customers need a higher-risk bond subject to credit and financial underwriting, they will have to manually review the submission, review the credit report and financial statements, wash their hair, clean their car read "War and Peace" and finally, after what feels like an eternity, provide you and your customer with a quote.
With this in mind, make sure your agency is partnering with companies that are capable of automated credit and financial underwriting.
