How do Surety Bonds differ from other lines of Commercial Insurance?
Most surety companies are subsidiaries or divisions of insurance companies, and both surety bond and traditional insurance policies are risk transfer mechanisms regulated by state insurance departments. However, traditional insurance is designed to compensate the insured against unforeseen adverse events. The policy premium is actuarially determined based on aggregate premiums earned versus expected losses. Surety companies operate on a different business model. Surety is designed to prevent losses. The surety prequalifies the contractor based on financial strength and construction expertise. Since the bond is written with little expectation of loss, the premium is primarily a fee for prequalification services.