Difference Between Bonds & Insurance

Perspectives on Risk

People and companies are exposed to all manner of risk ranging from theft and automobile accidents to illness and death. Insurance providers and surety providers offer services for managing risk, and each view risk from different vantage points. Insurance providers take on some or all of a principal's risk and promise to bear the responsibility for financial compensation. A surety provider serves a promissory function, bearing the responsibility for compensating the principal without taking on the risk. The risk remains with contract's obligee who purchased the bond for the principal's sake.

Insurance is a method for directly managing risk by way of two parties: a principal and an insurance provider. If an individual or entity wishes to reduce exposure to a specific risk, they solicit the services of an insurance provider. In return for a fee called a premium, the insurance provider supplies the principal with an insurance policy. This legally binding document indicates that the insurance provider will compensate the principal up to a specific amount should the risk occur.

While an insurance policy protects the principal, placing the risk and responsibility for compensation on the insurance provider, a surety bond protects the principal in a contractual arrangement. A surety bond guarantees that a third party surety provider will compensate the principal should the contract's obligee fail to adhere to its terms. The surety provider assumes responsibility for compensating the principal for claims of wrongdoing by the obligee, but does not assume the risk. The risk remains with the obligee, which must pay the surety provider the amount of the claim.

An insurance provider charges policy premiums using statistical metrics to assesses the likelihood that the risk covered by the policy will come to pass. Insurance premiums rise in proportion to the level of risk. Conversely, a surety provider charges a premium based on the contractual obligee's solvency, or preparedness to pay the amount pledged by the bond. Surety bond premiums rise in inverse proportion to the solvency of an obligee.