How should you determine risk when developing your fidelity bond strategy?
Companies seem to have a wide variety of strategies in determining how to get a surety bond for their company. Because of this, it is good to take a step back and look at those strategies on how a position fidelity bond is written and what the company is actually trying to protect.
Evaluate the Company
In addition, the actual underwriters from the surety company have a corresponding variety of criteria that they use in determining how to evaluate the fidelity bond. Their evaluation can take a variety of forms in order to assess and accurately capture the risks involved with the position being written. Many of the more conservative underwriters like to issue their policies based upon a strict view of the company. That is, they first determine that the employer itself has good management and a good reputation within the community. This would include a strong internal process of internal auditing, quality management practices and an internal staff that is stable. Employers that churn their employees are not seen as higher-tier when it comes to underwriting.
Evaluate the Position
The next step in the evaluation goes over the actual staff positions that are being written. Those positions should be bonded on a relatively consistent basis. That is, each year the company is willing to get a fidelity position bond as they are trying to reduce overall risk. Thus, they don’t get a bond one year and not the next, which can be an indication of systemic risk that is unseen by the underwriter. Then, the positions that are being written should be those that have quality supervision, which many times will disqualify sales persons as they are often times outside of the company’s normal auditing procedures.
Investigations on Positions
In the old days, a fidelity bond would be given only upon a thorough investigation on the person being guaranteed. Thus, any person that would need a bond would understand that their personal life would then become fully open to the underwriter, which would very personal questions about their marriage, spending habits, vices, etc.
As we have progressed in this country, these types of questions have given way to more sophisticated, and seemingly less intrusive, methods to determine trustworthiness. Credit scores and other personal information gathered from public sources (like Lexis Nexis) are all the rage in determining whether a person should be granted a bond upon their person.
Further, investigations that center around a position and not just a person, can also use this data to determine the proper amount of risk that is to be taken by the bonding company. This would include a more sophisticated type of inquiry (or more general type of inquiry, depending on how you look at it), which would develop a standardized score that would be applied generically across each person in the position. So, instead of actually reviewing 5-10 persons individually, a bonding firm would instead develop a score to be used for the position. These scores are surprisingly accurate in determining the proper rating.
The risk that is undertaken by a surety when developing a fidelity position bond has evolved over the years, along with society. As companies have learned how to get a bond, so have sureties learned how to evaluate the companies themselves. The more conservative underwriters now use a variety of tools to evaluate the risk, instead of spending time trying to underwrite individuals on a person-by-person basis. These new tools are very accurate and can help provide a great way to evaluate the risk of that position.