India’s insurance regulator has issued the final guidelines for surety insurance, a move aimed at supporting the infrastructure sector that’s prone to delays, defaults and litigation.<\/p>\n\n\n\n
The IRDAI (Surety Insurance Contracts) Guidelines, 2022 released on Jan. 3 allow only general insurers to offer such cover. And the norms detail regulatory caps and solvency requirements, among other aspects, of surety insurance bonds. The guidelines are effective April 1.<\/p>\n\n\n\n
Surety insurance bonds are essentially guarantees without a collateral that protect awarding authority, such as the government, from poor service, failure to complete a project, or default by the contractor. And such instruments also help construction contractors make efficient use of their working capital as well as ensure greater liquidity.<\/p>\n\n\n\n
A surety insurance is a tripartite agreement between the contractor (principal debtor), the awarding authority like the government department (obligee), and the insurance company (surety) issuing the instrument.<\/p>\n\n\n\n
What The Guidelines Say<\/strong><\/p>\n\n\n\n According to the final guidelines, only general insurance companies registered under the Insurance Act, 1938, will be allowed to issue surety bonds.<\/p>\n\n\n\n The guidelines bring in a new category for underwriting construction-related risks, Vikash Khandelwal, chief executive officer of surety solutions provider Eqaro Guarantees. “Allowing the surety insurers to work alongside the banks and other financial institutions to share risk-related information and technical expertise will help foster a robust ecosystem.”<\/p>\n\n\n\n But unlike the draft guidelines, the final norms do not provide for a specialist surety insurer. That, he said, may limit the number of companies who are able to extend this insurance.<\/p>\n\n\n\n “These are critical and may impede the creation of surety-related expertise and capacities, and eventually deter insurers from writing this class of business,” he said.<\/p>\n\n\n\n