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Surety Bonds: The Digital Advantage

Breaking Free of Legacy Systems, Embracing Technology to Keep Pace in a Digital World

Surety bonds are often thought of as, or confused with, insurance policies. However, they differ greatly in their purpose and the manner in which they are underwritten. While an insurance policy covers the financial risk resulting from specific outcomes, a surety bond is a three-party agreement by which the surety answers for the default of another’s promise to perform as per the contract or agreement.

One of the common use cases of surety bonds is in the “license and permit” context. The procurement of licenses and permits is a common endeavor that requires surety bonds. A contractor (the principal) is often asked by a government entity (the obligee) to guarantee his performance. The contractor, in such cases, secures the financial backing of a wealthy entity (surety/carrier) through a surety bond.

In case, the principal breaks the terms of the license/permit, the obligee can place a claim against the bond. The surety will first settle the claim and then pursue the principal for all damages, including legal fees.

Challenges in Underwriting Surety Bonds

The underwriting process—the ability to assess the risk based on the customer’s character, capital, and capacity—has remained almost unchanged for decades. Traditionally, bond producers, who have in-depth knowledge of the industry, resort to a thorough investigation of the contractor, and seek inputs from trustworthy third parties.

This process involves exchange of information, enormous data analysis, and coordination among multiple stakeholders. While this investment of time and effort is the key to success, it also limits the number of applications that can be effectively evaluated.   

The traditional evaluation process presents several challenges:

  • Meetings and information reviews are time-consuming
  • Evaluation of the contractor’s character becomes difficult in the case of new customers
  • Too much data for manual evaluation—emails, texts, reports etc.
  • Consolidation of third-party intelligence (credit reports, evaluations, assessments etc.) is time-consuming

While the demand for surety bonds is rising in the US, thanks to a booming construction industry, the existing framework is proving to be slow due to increasing complexity of the evaluation process and a shortage of qualified surety professionals. A more agile and optimized workflow is urgently needed to process applications in time to meet the market demand while controlling costs.

4 Key Benefits of Surety Solutions on a SaaS Platform

By leveraging emerging digital technologies, it is possible to keep pace with market demand at a reduced operating cost. A Software as a Service (SaaS) solution for the surety industry offers improved workflow processes, better risk evaluation capabilities, reduced costs, and scalability.

Here are some ways in which the surety industry stands to benefit from a SaaS solution:

#1 Process Automation: Intelligent software architectures can assimilate a wide range of surety-specific workflows, rating plans, underwriting rules, and internal and external users (underwriter, agent, principal, obligee, etc.). This will drive transparency, coordination, and faster approvals.

#2 Reduced Cost; Increased Capacity: Once checklists, parameters of evaluation, and data pre-requisites are configured to the solution, the algorithm can perform the tasks of due diligence, and number crunching, and deliver results for human review and further processing. This system can save time and enable evaluation of far more applications.

#3 Pay-Per-Use Model: A capex model of software implementation can be at least six times more expensive than the pay-as-you-go model. Imagine having the underwriting and form generation services delivered on demand from a cloud-based platform.

#4 Data Security: The underwriting environment is constantly evolving. Information and analytics are easier to access than ever, but sureties and underwriters need to have agile systems in place to effectively and securely use this data. A SaaS solution not only enables data analytics, it ensures secure and confidential data access/exchange between stakeholders.

Industry Trends

As per Aon Risk Management Solution’s “ Construction and Surety Market Update 2017,” the surety bond business continues its run of profitability. It says that surety underwriters have made more money over the last ten years than in the previous 100 years combined.

While the industry remains buoyant, the availability of talent is a high priority concern for contractors, surety underwriters, and brokers. Underwriting requires reviewing hundreds of pages of technical RFP documents. Estimators need to price new and increasing risk for exposures that owners are pushing onto contractors.  

This quest for growth puts undue pressure and stress on the existing talent pool of surety professionals. This talent gap can be addressed by adopting digital tools and technologies that complement the efforts of human resources. This also allows sureties a chance to explore new avenues and embrace evolution.

Moving from manual to automated workflows is key to succeeding in a digital environment. Embracing the SaaS model ensures better agility, efficiency, and budgetary flexibility. A SaaS solution allows companies to automate workflows, process bonds more effectively, enhance risk management, and optimize data analytics. Its quick implementation cycle, seamless upgrades and releases, and pricing model are designed to reduce costs, improve profitability, and optimize processes.


Nimble organizations must leverage SaaS solutions as tools for expansion and profitability. It is equally important to partner with a trusted service provider with deep domain knowledge and area expertise. To learn more on why subscription-based solution is cost-effective, click here.

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