Walking the line of a surety producer/agent and surety underwriter on the surface sounds difficult. In practice, it is just that… Challenging.
Entering the world of surety over twenty-five years ago, after years in the finance/banking industry, was a fairly smooth transition. Having worked as a consumer and business bank loan officer for small local branches, it teaches you to be responsive to the needs of your customers, if you want to keep them and grow your office. First stepping out on your own to open your first lease/financing company with all the responsibilities of making rent, bills and payroll also schools you to think ahead, plan ahead, and be visible to your referring vendors and potential customers. It implants in you the value of your word and deeds in business and the true worth of building relationships.
Having your own firm can also teach you that you cannot always predict what will happen. You should always plan for the best and be prepared for the worse. With collapsing economies comes collapsing businesses. To say that closing a business to jump into a new career can be character building is an understatement. It strengthens and challenges the inherent “lack of Fear of Failure” that all successful entrepreneurs must call on sometime in their business life.
Diving into the role of a surety agent with the prior learned lessons seemed to be as natural as walking down a street. Applying the learned knowledge of analyzing financial presentations with the experience of running a small business and valuing customer care, made the world of a surety agent feel like a perfect fit. Was everything just plain easy? ….No, not really.
More lessons are learned along the way. You find associations and relationships that work well and others that disappoint. Often, you might feel like you are weaving your way through a maze of obstacles and rewards. But, continually applying the early learned practices, while building on the acquired affirmative associations and connections, gives way to positive results. Naturally, being in the right place at the right time can never hurt.
Operating a small contract surety agency is enjoyable. One on one communications with your contractors and underwriters are done on almost a daily basis. You know every aspect of your contractors’ business, family and goals. You work hand in hand with them and their CPA’s to make sure the flow of surety support was not interrupted. You deal with problems as they come up and give advice and at times bad news, when needed.
In those years of running a contract only agency, there were many celebrations of success and a few gut wrenching disappointments. Claims were far and few between; but, there are one or two you take personally. As a Surety Agent, you have grown accustomed to relying on a high level of “Trust” within your relationships. Having that trust broken after years of working together stains the memories and makes the road to establishing a level of trust that much more difficult. It is the lesson of having that trust broken by a contractor that you had worked with for years that can give you the difficult balance you need when you become an underwriting agent with authority.
Growing a surety agency is always hard, but rewarding work. Twenty years ago, as with most small surety agencies, contract surety was what we produced. Any commercial surety needs were referred out to one of the larger firms that had the personnel to handle the stray license or miscellaneous bond request. For handling the volume of commercial bonds to be profitable would take quite a few more staff than it takes to handle the higher premium contract surety bonds.
The 2008 team of South Coast Surety
About then, being in the “right place at the right time” stepped in. As a small contract surety shop with a full staff of 5, we were handed an opportunity by a friendly underwriter known for many years. The surety was eliminating their commercial surety business and along with the bonds, hundreds of insurance agents that placed the business. Our longtime associate knew us to be thorough and responsive and decided to refer all of their regional insurance agents to us for their commercial surety bond needs. We went from a basic contract surety shop that did an occasional license bond to a wholesale surety agency servicing the commercial surety needs for hundreds of insurance agents overnight.
What followed were many twelve hour days, as we developed systems to manage the incoming insurance brokers and expand our knowledge and capabilities in handling the very wide scope of commercial surety bonds. The industry was in the early stages of modernizing commercial bond processing and the days of triplicate NCR forms were in our rear view mirror. On line handling of the most numerous commercial bond classes reduced the staff size needed for a volume of transactions; but still additional staff support is needed.
While on a very basic level the review of financials and credit for contract surety and commercial surety are the same, the many classes, codes, exposure levels and bond language risks creates a wide underwriting gap between the two surety worlds. Contract surety at its base has changed little in a hundred years. Commercial surety seems to have new product and risks popping up every day. While never abandoning contract surety roots, it was necessary to plunge into this new surety environment in order to take advantage of what was handed to us. With the ever-changing commercial surety landscape, this new arena was never dull.
The more we learned and accomplished, the more avenues with commercial surety markets as well as contract surety markets opened up. We studied the very few surety wholesalers who existed at the beginning of our wholesaler journey and created our own operational model to follow. We developed relationships with a number of “Specialty” surety companies and then promoted our access and ability to write within the specialized as well as standard marketplace. We heavily promoted our “Bond Only” concept, positioning ourselves as the backroom surety processors for our producing insurance agencies.
In the first decade of being a direct and wholesaler surety agency we built our knowledge base, our surety market support and our level of staffing as the volume of referring insurance agents grew from the hundreds to the thousands. Our website, first built when our company was just starting, became more robust and active. With the long hours of work and volumes of surety cases, we became even more knowledgeable about commercial surety. We had a growing book of “Transactional Surety” at a time when most agencies and surety markets focused on building account relationships. We had a few underwriters that said that they had no interest in seeing any “transactional” business. Then we had some surety firms that stepped up and said, yes, they would like to build a volume of transactional business.
We also determined that successful growth was directly attributable to having the ability to provide fast, consistent and reliable service to our applicants and our brokers. With the volume level of transactional surety bonds growing, we knew we could either overwhelm a surety underwriting department or be adding days to the average turnaround time for each transaction. With these production challenges, it soon became apparent that to continue our growth, we needed to add a level of in-house underwriting authority. A number of the surety company executives and underwriters we dealt with agreed.
Many surety companies recognized that having a bond only agency such as ours could work as an “Aggregator” effectively booking the volume of transactional surety without adding to the department’s overhead that would be necessary by having additional underwriters to deal with the number of small “one off” and small volume insurance agents. Towards the end of our first decade, we added the underwriting authority, granted to us by our surety company partners, to our capabilities and became a true Managing General Surety Agency.
At first, much of the authority was bond specific with very strong guidelines. The underwriting decisions were fairly scripted with specific details on what would be allowed and at what rate. As the surety underwriters saw how we performed and as we built our book with little to no claim issues, our reputation in the industry grew, as did the amount and latitude of authority and offers from companies for more authority.
In the early part of our second decade, we had a startup surety company approach us to develop a commercial surety program that included sub-standard and non-standard credit profiles. They had developed filed rates that were on the line with the very few such programs then in existence. We helped design the program and promoted it heavily. We saw it catch on quickly and managed it until the surety decided to expand their direct agent base. The experience and knowledge gained by creating this program helped us develop similar programs with other surety partners.
Also, in the first half of our second decade, we had developed considerable experience in the Non-Construction contract surety sector. We had actually been involved in supporting supply install contractors as well as service contractors since our early beginnings. As out-sourcing became more prevalent, it was natural to promote the bonding of such contracts. With our knowledge base and understanding we helped another surety develop a small contract application program similar to the many construction type programs in existence. We built it up using the underwriting authority the surety granted us. Soon the surety opened up the program to all of their agents.
This is when other surety partner companies reached out and offered to give us authority for small contract in construction and commercial as well as a full slate of commercial surety authority. Our staffing had grown to four times the size of the early years, our insurance broker base was approaching 10,000 and we had the personnel and experience in place for growing such a successful program. With the authority, of course, came much more responsibility.
With decades of promoting surety business to attract new brokers and accounts, we now had considerable autonomy in underwriting and approving that business. And that is where it is learned that the freer your hand is, the more concerned you become about how you use it.
We began this by stating that a combined surety producer/agent and surety underwriter is a challenge. You find yourself with two completely different jobs and accountabilities. You are responsible to book as much surety as you can and then restrict that growth by maintaining tight underwriting standards. It is sort of a Jekyll and Hyde existence. But is one, when done right, which is very satisfying and rewarding. The life of a Surety MGA can be many things; but rarely is it boring.
If you have any questions and want to chat, I'm always available to talk shop. It's been 25 years yet I haven't grown tired of talking about surety. Call 1-800-361-1720 and ask for Steve.
Our current office in San Clemente, CA.