Surety Bonds stuck: Irdai asked to come up with model product


In a bid to break the deadlock over the launch of Surety Bonds, the Ministry for Road Transport & Highways (MORTH) has asked insurance regulator IRDAI to develop a model product on Surety Bonds in consultation with general insurers.

Road Transport Minister Nitin Gadkari had met the CEOs of some general insurance companies along with SN Rajeswari, Member-Distribution, and acting in charge of Non-life, IRDAI, in New Delhi to fix some of legal and technical hitches that are preventing the general insurers from launching Surety Bonds, which can replace expensive Bank Guarantees. All macro rules and regulations as prepared by the government of India and IRDAI were already in place since April 1.

The minister, who discussed several challenging issues which made Surety Bond a complete non-starter with the insurers, proposed to the IRDAI that it should design a model product having all the basic features that can be given to them for its launch. “The insurers can further improvise the product according to their capacity and on the basis of reinsurance support,’’ said the CEO of a general insurance company, who had attended the meeting.

A surety bond is provided by the insurance company on behalf of the contractor to the entity, which is awarding the project. When a principal breaks a bond’s terms, the harmed party can make a claim on the bond to recover losses.

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The issue of changes in Indian Contract Act and Insolvency and Bankruptcy Code (IBC) as wanted by the general insurers — so that Surety Bonds can be at par with bank guarantees when it comes to recourse available to them in the case of a default — are also being looked into, but the launch of Surety Bonds should not completely wait for that, he said.

Anjan Dey, CMD, Oriental Insurance Company, Prakash Chandra Kandpal, MD & CEO of SBI General and Ritesh Kumar, MD & CEO, HDFC Ergo had attended the meeting.

Aimed at supporting the implementation of large-scale project finance, particularly in the area of road projects of National Highway Authority of India (NHAI), Finance Minister Nirmala Sitharaman, in her Union Budget 2022-23, had said that bidders for government projects could supply Surety Bonds instead of bank guarantees, which are much more expensive, thus improving the viability of their bid.

After the Union Budget, the IRDAI had come out with the detailed norms on the issuance of Surety Bonds by the general insurers. However, the general insurance industry wanted changes in Indian Contract Act and Insolvency and Bankruptcy Code (IBC) so that surety bonds can be at par with bank guarantees when it comes to recourse available to them in case of a default.

“Given the Surety Bond is an entirely new line of business, insurance companies would need clarity on various aspects such as pricing, the recourse available against defaulting contractors, reinsurance options and global best practices,” said an official. “As an industry, we would urge the regulatory bodies to facilitate changes to laws such as the Indian Contract Act and the IBC and bring surety bonds on par with bank guarantees regarding recourse available to issuers. This will help the industry approach surety solutions with much more confidence, but it will be even more a viable proposition for all stakeholders,” he said.

Officials said a huge market is available for Surety Bonds in the country and now, the onus is on the insurance fraternity to come out with products quickly. “The onus is on the insurance fraternity to come out with products quickly. We have already initiated at authority level discussions with the insurance agencies and companies,” they said.

The big challenge for new players is that often they find it difficult to get bank guarantees and that’s where the role of Surety Bonds comes in. The government has planned investment worth Rs 7 trillion for infrastructure projects to be spent over the next 2-3 years.





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