Irdai issues guidelines for promoting, regulating surety insurance business

The insurance regulator, Insurance Regulatory and Development Authority of India (IRDAI), has come out with guidelines to promote and regulate sustainable and healthy development of the surety insurance business in the country. The guidelines will come into force from April 1, 2022.

A surety bond is a three-party contract by which one party (the surety) guarantees the performance or obligations of a second party (the principal) to a third party (the obligee). The surety is provided by an insurance company on behalf of a principal or contractor to the obligee or government entity awarding the project.

Surety bonds protect the beneficiary against acts or events that impair the underlying obligations of the principal. They guarantee the performance of a variety of obligations, from construction or service contracts to licensing and commercial undertakings.

A working group set up by the insurance regulator had recommended promoting the development of the surety bonds markets in the country, after which the regulator had come up with the draft regulations in September last year.

According to the regulator, a general insurer can commence a surety insurance business if it has 1.25 times the solvency margin it is required to keep. Also, if at any point in time the solvency of the insurer goes below the required level, the insurer has to stop underwriting the new surety insurance business until its solvency margin is restored to above the threshold limit.

Further, the regulator has said the underwritten premium in a financial year for any general insurers from the surety insurance business shall not exceed 10 per cent of the total gross written premium subject to a maximum of Rs 500 crore.

The insurers need to have a board-approved underwriting philosophy on the surety insurance business, incorporating all aspects for managing this business, the regulator has said. Further, the insurers can work together with banks or other financial institutions such as NBFCs to share risk information, technical expertise to monitor projects, cash flow amongst other aspects. They can also work with contract awarding authorities in order to evaluate the risk with more information and data.

Experts believe, allowing the surety insurers to work alongside banks and other financial institutions to share risk-related information and technical expertise will help foster a robust ecosystem and prevent contagion.

The regulator has said the surety insurance contracts can be offered to infrastructure projects of government/private in all modes. The contract bonds may also include bid bonds, performance bonds, advance payment bonds and retention money. Apart from contract bonds, the insurers may underwrite Customs or tax bonds and court bonds.

Further, the regulator said, the limit of guarantee shall not exceed 30 percent of the contract value. Also, surety insurance contracts should not be issued only to specific projects and not clubbed for multiple projects.

“Surety insurance contracts shall not be issued where the underlying assets / commitment are/is outside India. Further, the payment for risk covered under the surety Insurance contracts shall also be made in Indian rupees”, the regulator said.

“It would have been ideal if the final norms had also provided for a specialist surety insurance company. There is also a 10% cap subject to a limit of Rs 500 crores on the quantum of surety business that an insurer can write. The guidelines are also silent on the right of recourse available to a surety insurance company in the event of a default by the contractor. These are critical and may impede the creation of surety-related expertise and capacities and eventually deter insurers from writing this class of business”, said Vikash Khandelwal, CEO, Eqaro Guarantees, a surety solutions provider.