Surety Bond Process Making the Leap to Automation

ABOUT THE AUTHOR: Brian Beggs is vice president and head of bonds at The Main Street America Group.

It wasn't that long ago that surety bonds were routinely processed with a typewriter and delivered by hand. Indeed, the typewriter is still part of the equation for some independent insurance agencies.  Surety has been particularly slow to automate, but we've finally made significant progress.

According to The Surety and Fidelity Assn. of America, most sureties have automated at least part of the bond-generating process. And national sureties, as well as some regionals, have automated most or all of the process. 

Read related: “Untangling the Options.”

What does this mean to you?  Automation makes routine probate, auto dealer and real estate bonds not only doable, but even attractive for a property-casualty agency.  Foy Insurance Group, an independent insurance agency in Exeter, N.H., has been writing a wide range of bonds for 30 years. But Mike Foy, the agency's president, said without automation, “writing smaller bonds like probate wouldn't be worth it.”  

While the commissions are high—typically 20 percent to 30 percent—they're based on minimal premium. 

“On a good processing system, it takes five minutes to complete an application, and from start to finish, 15 minutes to generate a bond,” Foy said. “ So with a process that takes just minutes, you have another revenue source.”

Writing bonds has other benefits, such as helping to cement customer relationships, Foy said. His agency initially began writing bonds to accommodate an existing commercial insurance customer. He felt that if you can't write a bond for your customer but your competitor can, your competitor may next go after your customer's P&C business.

And if you are writing a bond for a bond customer, “you've got an opportunity to cross-sell other products,” Foy said. “We've had a lot of success doing this. What's more, when you write bonds for attorneys, real estate agents and car dealers, they become new referral sources for your other product lines.”

There's a lot to be gained from writing smaller bonds when it can be done quickly and efficiently through a good processing system. But what is a good system?

There are vendor-built systems that give an agent the ability to quote and execute a bond. But the agent needs enough volume to justify the expense.  And as the cost of a system is prohibitive for most agencies, it falls on the surety to build it.

Read related: “Surety Capacity Remains Ample and Inexpensive, Despite Construction Downturn.”

Although most sureties today have automated at least part of the bond process, there's a big disparity in the functionality and quality of the systems. The best systems automate the whole bond process, from rating to underwriting to execution. There aren't many of these around, but you'll find them with some of the larger P&C carriers and some of the super regionals.

The Main Street America Group developed our bonds processing system in 2008. Today, we generate more than 90 percent of all of our bonds transactions through this system.

When looking for a surety to write your customers' bonds business, learn as much as you can about their system, such as: 

• Ease of use: How hard is it to move around screens? How many screens are needed to get to the end of a transaction? How many times do you need to enter the same data?
• Forms library: With so much variation in bonds forms, how robust is the forms library? Does it include the forms for your territory?
• Execution time: On the good systems, you should be able to write a bond in under five minutes.
• Help functionality: The system should provide underwriting tips and quick reference for rating.
• Bond glossary: Like many industries, surety has its own language. A glossary is important to give you immediate access to definitions and not slow down the execution process.
• Customer service: No matter how good the help functionality and glossary, you will most likely have questions at some point. Access to customer service is critical.

Good systems also process endorsements, name changes, cancellations and renewals.  And they are available 24/7.

Although we have made great strides in bringing bonds into the 21^st century, we have not been able to develop a fully integrated system. Perhaps the biggest Achilles' heel has been the inability to link carriers' bonds systems to agency management systems. 

Agency management system vendors have not been overly receptive to investing in the technology to make this happen because there has not been strong demand from insurance agencies. As Robert Duke, director of underwriting and counsel at The Surety & Fidelity Assn. of America said, “We need enough players on all sides to make a commitment…Where there's not automation, there's still a lot of paper. A surety still asks for financial statements, resumes and work in progress documents, which generally are all still in paper form. And the court system, which relies heavily on original documents and signatures, is essentially paper based. There will come a point someday this will all be sent electronically.”

The Surety & Fidelity Assn. is working to bring “someday” a bit closer. The association's E-Business Committee, under the leadership of Greg Davenport, senior vice president of operations and strategy at Liberty Mutual Surety, has been charged with building standardization into an industry where there is currently very little. One of the committee's accomplishments, Davenport said, “was to create guidelines on what functionality needs to be built into an e-bonding system for it to be a viable solution.” 

The committee's current effort is to tackle proof of power of attorney, which is today printed on special paper and embossed with a seal, and is required for all bonds. “Our vision is to deliver all bonds in real time and to do that, we need to eliminate the need for specially printed power of attorney documents,” Davenport said.

The e-business committee is promoting the development of an electronic database for sureties to register agents who have been authorized with power of attorney. Obligees (businesses being protected by a bond) can then tap into the database to verify their agent is an “attorney in fact” instead of requiring special paper as proof. 

As Duke put it, the aim of all these efforts is “no-touch” automation. Is this a lofty goal? I don't think so. In 15 years in the bonds business, we have almost eliminated the typewriter from the bonds process. Here's hoping it doesn't take quite that long to achieve complete straight-through processing so the agent can sit back and just watch the revenues flow in the door.