Three concepts that round out the commercial knowledge required of a RIBO broker.
- Surety bonds, three-party agreements where the surety guarantees the principal's performance to the obligee. Common bond types: performance bond (contractor will complete the project), labour and material payment bond (contractor will pay subcontractors and suppliers), fidelity bond (employee will not commit dishonest acts, overlaps with crime), and licence and permit bonds. A bond is NOT insurance in the indemnity sense: if the principal defaults, the surety pays the obligee and can recover from the principal.
- Reinsurance, insurance of insurers. An insurer cedes a portion of its risk to a reinsurer in exchange for a premium share. Allows insurers to underwrite larger limits than their surplus alone could support and to manage catastrophe exposure. Reinsurance is invisible to the insured but is the backbone of commercial capacity.
- Managing General Agent (MGA), an intermediary granted underwriting authority by an insurer to administer specific programmes (niche commercial classes, hard-to-place risks). Brokers deal with MGAs as if dealing with the insurer for that programme; the MGA has binding authority within defined parameters.
The broker should understand which markets are placed through MGAs versus directly with insurers, because servicing pathways and declination patterns differ. Trust account discipline applies identically to MGA placements.
Common mistake: equating a surety bond with an insurance policy. A bond is a credit guarantee with recovery against the principal; an insurance policy spreads loss and does not (usually) seek recovery from the insured. Mis-selling a bond as "insurance" is a conduct issue.
🧠 Memory hook, "Bond: three parties; Insurance: two parties". Surety, principal, obligee on a bond; insurer and insured on a policy.
Recall: Distinguish a surety bond from an insurance policy. What is the function of reinsurance from the primary insurer's perspective?