SIC 6351

This classification provides coverage of establishments primarily engaged in underwriting financial responsibility insurance.

NAICS Code(s)

524126 (Direct property and Casualty Insurance Carriers)

524130 (Reinsurance Carriers)

Industry Snapshot

Surety insurance, sold in the form of a surety bond, is a tool used to guarantee the performance by one party of an obligation to another. It differs from other types of insurance in several ways — including the number of parties involved, the way companies determine premium rates, and in the way that the burden of risk is apportioned. The most common type of surety insurance is construction bonding, which insures that contractors will be able to complete a construction contract and pay their suppliers and subcontractors. Other common types of surety insurance include bonding of employees (fidelity insurance), license and permit bonds, and court bonds.

Organization and Structure

Surety insurance can cover almost any contractual agreement, whether the contract is written or implied. Although it is often classified as a line of property/casualty insurance, surety is similar to other types of insurance only in that it is a form of risk management. Because it is different in other ways, surety bonding is usually offered through a separate division or department within an insurance company and is governed under a different set of laws from other insurance lines.

Surety insurance involves three parties: the principal, the obligee, and the surety (insurer). The principal is the party who agrees to perform an obligation. For example, a builder may contract to construct a building. The obligee expects the principal to fulfill a contract. In the example above, the obligee would be the party with which the builder agreed to construct the house. The surety, then, is the party which guarantees that either the principal will perform adequately or the obligee will be compensated for the principal's failure. For instance, if the principal finished building only part of the house and then quit, the surety might compensate the obligee for any losses incurred in getting another builder to finish the home. In the example, and in most cases, the surety is not necessarily responsible for fulfilling the broken contract, but only for the obligee's losses related to completion of the contract. For this reason, surety insurers do not necessarily cover risks associated with devastating losses, but only with varying degrees of default risk.

Another major difference from other types of insurance is that surety insurers look to the insured party for repayment of losses it incurs. In the example, the surety would be entitled to recover its losses from the principal, unless the principal was insolvent. For this reason, the risk associated with writing bonds has traditionally been very low. In fact, theoretically the surety anticipates no losses if the underwriter has used the necessary information about the principal required to determine whether or not to write the bond.

Surety insurance also differs from other insurance lines in the methods insurers use to determine premium rates. Because the risk to the surety is usually very low, premium rates for surety bonds are primarily service fees and are less influenced by the risk of loss. Fidelity insurance, which covers a company against losses caused by dishonest performance by its employees, is a major branch of the surety industry. By the mid 1990s, fidelity bonds constituted about 31 percent of all direct surety premiums written.

Company Structure. The surety market is divided into the standard market and the specialty market, each of which is served by different types of surety companies. The standard market represents the more traditional approach to surety bonding and is served primarily by large national agency companies. These companies tend only to underwrite clients which have a very sound financial history and represent little risk of insolvency or contract default. In addition, many national agency companies only underwrite contracts which assure $25,000 to $50,000 in gross premiums per year. In 1995, national agency companies wrote nearly 60 percent of all surety premiums, with about 30 percent written by regional companies and 11 percent by direct writers. Of these premiums, the 20 leading surety writers accounted for $1.87 billion in premiums—69.1 percent of the $2.71 billion surety market. National agency companies wrote 68 percent of all fidelity premiums in 1995, with 10 percent written by regional companies and 22 percent by direct writers. The top 20 fidelity writers accounted for $843.6 million in premiums written, or 91 percent of the $927.5 million fidelity market.

The specialty market, on the other hand, is served primarily by regional agency companies. These companies are less strict in their underwriting requirements and will generally bond contractors that the standard market may have rejected. Regional companies are able to serve these clients because they require collateral of 20 percent to 30 percent of the bond obligation for each contract they insure. In addition, regional companies are more likely, and able, to vigorously pursue recovery from their clients in the event of default.

The biggest expense for surety underwriters involves qualifying applicants, not providing loss compensation. Surety writers do not expect losses, and they focus their efforts on screening out risky applicants. Premium rates reflect the cost of providing a credit-based guarantee rather than loss compensation. In the mid 1990s, surety writers showed an improved operating ratio, indicating they were controlling costs such as commission and brokerage expenses and other underwriting expenses associated with screening applicants.

Market share in the surety industry is split between national agency, multi-line companies, which serve the standard surety market, and regional agency companies, which serve the specialty market. In 1995, national agency companies wrote nearly 60 percent of all surety premiums and 68 percent of all fidelity premiums. Regional companies wrote about 30 percent of surety premiums and 10 percent of fidelity premiums, and direct writers wrote 11 percent of surety premiums and 22 percent of fidelity premiums. Of the surety premiums, the 20 leading surety writers accounted for 69.1 percent of the surety market. The top 20 fidelity writers accounted for 91 percent of the fidelity market.

Major Products. Surety products can be separated into two categories: those that are easy to obtain, and those that are more difficult. Bonds that are relatively easy to obtain typically involve small amounts of money or present a low level of risk to the surety. Bonds in this category include license and permit bonds, which protect city or state governments against claims that arise because of a license which the government body issued to some party. Court fiduciary bonds, which bond a person named to handle money for an estate, and judicial bonds, which ensure that a plaintiff will pay damages to a wrongly charged defendant, also fall into this category. Public official bonds, which bond officials against losses resulting from their failure to conduct their duties within the confines of the law, are also easy to obtain. Bonds that are difficult to obtain include construction-related bonds such as performance, payment, and bid bonds.

Legislation. Surety companies benefit from state and federal legislation that requires bonding of various types of contracts. These laws require, for instance, that employers who self-insure employee benefits are bonded. Similarly, many states require automobile owners who have been in an accident to post a bond of financial responsibility before they allow them to operate their vehicles again. One of the most prominent pieces of legislation in this regard is the 1935 Federal Miller Act, which requires prime contractors in the United States to provide a performance bond for any construction contract which exceeds a certain amount. In 1992, this amount was $25,000 in total construction costs.

Background and Development

Although the concept of suretyship dates back more than 2,000 years to ancient Babylon, the commercial surety industry in the United States did not begin until 1884 with the incorporation of the American Surety Corporation of New York. Since that time, the industry has grown steadily and, until recently, has had comparatively high profitability. The industry realized its greatest growth and profitability during the rapid national expansion that occurred between the end of World War II and the early 1970s. During this time, the construction industry was not very competitive, a booming economy created demand for all lines of bonds, and profit margins were high. During the past 20 years, however, increased competition, as well as an overall decrease in demand for construction, has reduced profit margins for insurers and increased the risk of default and insolvency for those insured or bonded. Surety and fidelity underwriters showed profitable underwriting results in the late 1980s and 1990s, with surety lines being profitable from 1989 through 1995 and fidelity lines being profitable from 1986 through 1995. Surety premiums written increased steadily from 1987 through 1994. Premiums written for fidelity bonds, after double-digit increases from 1985 through 1987, declined from 1988 through 1992, then began increasing slightly from 1992 through 1995.

There were $2.8 billion in direct premiums written for surety and fidelity bonds in 1995, with $2.71 billion for surety bonds and $927.5 million for fidelity lines. For surety lines, that represented the third straight 9 percent or better annual increase, while fidelity lines posted a 2.1 percent increase in net premiums written. Surety and fidelity underwriters showed profitable results in the late 1980s and 1990s. In 1995, surety underwriting profits nearly doubled to $276.9 million, while fidelity under-writing profits were flat — up only 1.9 percent to $232.9 million. By comparison, most other lines in the property and casualty insurance industry experienced under-writing losses from 1979 through 1995. In 1995, the overall property/casualty industry posted underwriting losses of $18.1 billion.

Although distinctly different, the surety industry is considered a small part of the overall property and casualty insurance industry. In 1995, surety and fidelity insurance accounted for about $2.8 billion in premiums written — a small amount compared to the $250.7 billion in net premiums written by property and casualty insurers in 1994. Surety and fidelity underwriters showed profitable results in the late 1980s and 1990s. In 1995, surety underwriting profits nearly doubled to $276.9 million, while fidelity underwriting results were flat, up only 1.9 percent to $232.9 million. In terms of premiums written, surety bonds recorded a 9 percent annual increase from 1993-95. Premiums written for fidelity bonds decreased steadily from 1988-92, then began showing small percentage gains through 1995.

Current Conditions

In some ways, the surety insurance industry works opposite to the rest of the insurance industry, thus acting as a counterbalance for integrated companies. For example, the overall industry chalked up 1997 as a banner year, in part due to the mild weather attributed to the influence of El Nino, which resulted in low catastrophe losses for the insurance industry. By comparison, 1998 represented a worse year, with more catastrophic weather requiring more insurance-financed construction. The surety industry experienced 1997 and 1998 conversely: the mild weather of 1997 meant less catastrophe-based construction, hence less surety bonds; on the other hand, the more catastrophic weather of 1998 created more construction work requiring more surety bonds, thus bolstering the surety industry.

Since a large part of surety and fidelity insurance is related to the construction industry, the industry tends to follow the cycles of the overall economy. The industry has been helped by good economic conditions in the 1990s, including low interest rates, low inflation, and stable oil prices. Other factors influencing the industry's performance include federal initiatives to build infrastructure and natural disasters that increase demand for construction bonds.

Legislation passed by Congress in 1991 was expected to expand the role of surety insurers in the cleanup of environmental waste sites. The laws free sureties from liabilities for tort claims related to default by bonded contractors. This could be an important development for sureties during the next few decades and beyond because of the potential for increased environmental cleanup costs and the billions of government dollars already earmarked for the Superfund cleanup. On the other hand, legislation that could raise the minimum cost for federal construction contracts, which must be bonded from the current level of $25,000 to $100,000, could hurt the industry. This legislation would allow contractors to bid on and complete smaller construction jobs without having to buy a bond under the Federal Miller Act.

In reality, the Superfund did not produce the kinds of results expected because its funding got bogged down in Congressional debate. Only one-third of the sites covered by the Superfund were cleaned up as of 1998. However, that year Congress tried to jump-start the Superfund by allocating $650 million of expedited funds.

Industry Leaders

Of the companies which primarily provide surety insurance, the industry leaders include Travelers Surety and Casualty Co. of Hartford, Connecticut, whose 200,000 employees generated $27 billion in sales for 1998. MBIA of Armonk, New York, with 46 workers, a mere fraction of Travelers', created more than $12 billion in sales for the same fiscal year. In comparison, MBIA's sales represented $268 million per employee, while Travelers generated only $135,000 per employee. AMBAC Financial Group Inc. of New York City garnered more than $11 billion in sales for the same fiscal year on the work of 340 employees, each of whom generated almost $33 million. Although many surety companies began by providing only surety or fidelity insurance, many of the companies in this industry now provide multiple lines of insurance.


The entire property and casualty insurance industry employed about 616,000 people in 1994, while non-property/casualty insurers employed about 935,000 people. Of the approximately 6,000 insurance companies in the United States, about 3,300 sell some form of property and casualty insurance. Many of the property/casualty companies offer multiple lines of insurance, including surety insurance. However, about 900 national property/casualty companies account for most of the sales. Surety insurance accounted for approximately 1.1 percent of property/casualty sales in 1995 and accounted for a similar proportion of the jobs within the industry.

Job opportunities in the surety industry mimic those available in the larger property/casualty insurance industry. Positions in the surety industry, as in the property and casualty industry, are available in sales, underwriting and accounting, legal, and staff support.

Job opportunities also exist at regional agency companies, most of which do not provide other lines of insurance. Because these regional companies emphasize collateralized contracts and tend to vigorously pursue losses from bonded clients that default, positions with these companies require fewer credit and underwriting skills and more legal knowledge related to subrogation.

America and the World

Although it had a late start, the surety industry in the United States is the largest and most sophisticated in the world. However, its organization and structure closely parallels the surety industry of Great Britain, after which it was modeled. While the fire, marine, and casualty insurance industry in the United States experienced an influx of foreign investment and participation during the 1980s, the surety industry remained relatively local. This is due in part to the advantage which regional companies have when pursuing losses in court from clients that default on bonds.

Another factor responsible for a lack of cross-border activity within the industry is the nature of surety insurance compared to other lines of insurance. Surety bonding more closely resembles a fee-based service than it does typical insurance underwriting. Therefore, the investment advantages gained through foreign ventures are diminished.

Research and Technology

Because its basic function has changed little since its inception in 1884, the U.S. surety industry has been slow to realize the advantages of efficiency available through increased automation. The industry is just beginning to implement automated systems to ease workload. The types of automation include computer networking, information delivery and management systems, and multimedia training tools. Automation is especially important as the industry continues to become more price competitive.

Another important technical development for surety insurers in the early 1990s was a corporate interest in the use of surety bonds as a tool to obtain low-cost financing. Firms with strong credit ratings found that they could issue debt using company assets as collateral and then obtain surety bonds that guaranteed payment of the debt. By doing this, the firm which bought the bond could eliminate the risk of company insolvency related to the insured debt. This technique allowed companies to obtain low-cost financing during the credit crunch of the early 1990s. It also provides a potential new market for sureties throughout the 1990s.

Further Reading

Bowers, Barbara. "1997: A Year of Profits, Mergers and Regulation Tussles." Best's Review — Property-Casualty Insurance Edition, January 1998.

Farinella, Michael A. "Lower Claims Boosted 1995 Under-writing Profits." Best's Review, Property/Casualty Edition, September 1996, 26.

Gilbert, Evelyn. "1995 Surety and Fidelity Results Called 'Excellent'." National Underwriter: Property & Casualty/Risk & Benefits Management Edition, 24 June 1996, 13.

Gorke, Thomas P. "Guaranteeing Performance: The Role of Surety Bonds." Risk Management, November 1996, 22.

Infotrac Company Profiles, 20 March 2000. Available from .

May, Ronald A., et al. "Annual Survey of Fidelity and Surety Law." Defense Counsel Journal, January 1996, 86.

1996 Property/Casualty Insurance Facts. New York: Insurance Information Institute, 1995.

Sclafane, Susanne. "Insurers Report Fortune Reversals in 1998." National Underwriter Property & Casualty-Risk & Benefits Management, 1 March 1999.

"Surety Bond Industry Grows Modestly in 1995 — Mixed Projections for '96." ENR: Engineering News Record, 25 March 1996, S3.

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