Why are premiums charged to the surety?

Premiums are charged to the surety primarily to establish financial backing for the obligations they are guaranteeing. When a surety bond is issued, the surety company is essentially promising to fulfill the obligation of the principal if they fail to do so. The premiums collected represent a portion of the risk the surety undertakes, providing the company with the necessary funds to cover potential claims made against the bond.

This financial backing is crucial because it assures the obligee (the entity requiring the bond) that there are adequate resources available should a default occur. It reflects the surety's financial strength and ability to handle any claims that may arise from the bond, thereby instilling confidence in all parties involved in the transaction. The bond's effectiveness is directly tied to the surety's established financial capacity, which is supported by the premiums collected.