High Risk Type of Bond?

[Redbull]

I was told that an MVD bond is a high-risk type of bond. Is the actual type of bond a high risk, or are most of the applicants a high risk?

[Admin]

Great question!

However, it is a difficult one to answer, as many have different opinions on this. Therefore, keep in mind, the following answer is my opinion based on discussion with multiple carriers that have conflicting opinions.

First, you need to know that not all bonding companies agree that dealer bonds are a higher risk bond. If you are coming from that perspective, then one would assume that the actual bond is not particularly risky, but that other carriers are not stringent enough in the their underwriting.

In my experience, I have seen more auto dealer claims than any other commercial bond type. However, we often write clients with bankruptcies, tax liens, low credit, no credit, unpaid collections, etc. Therefore, it isn't a true assessment since those applicants would not qualify under traditional surety underwriting methods.

With considering the above, I would lean towards the fact that the bonds aren't necessarily involve much more risk, but at times the backgrounds of the applicants do. However, Florida and Texas seem to have incredibly high claim ratios. Therefore, I would say that those states are a higher risk regardless of the applicant.


I know the answer on the above isn't 100% clear, but it is a difficult one to answer. If there was a definitive answer, we would no doubt see more uniform underwriting criteria from all of our sureties.

If you wish to study it further yourself, take a look at the SAA's loss ratios in comparison to other commercial bond types.