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At least three insurance companies are looking to launch a surety insurance product, of which Bajaj Allianz General is set to be the first company to launch the product on December 19.
This will make it the first general insurance company to launch the product after Finance Minister Nirmala Sitharaman in this year’s Budget had said surety bonds can be used as a substitute for bank guarantees for government procurement.
SBI General Insurance and Tata AIG General Insurance are also said to be looking at launching a surety insurance product soon, said sources. However, India’s largest private sector general insurer — ICICI Lombard General Insurance — is still evaluating the contours of the product, given the recovery process in case of a default is still a vexed issue for a number of companies in the industry.
“It’s a very complex product, in terms of how we issue it, pay the claims, and the recovery process,” said a source aware of the development.
Insurers were seeking changes to the Indian Contract Act and the Insolvency and Bankruptcy Code (IBC) to bring surety bonds on a par with bank guarantees when it comes to recourse available to them in case of default.
The insurance regulator was said to have reached out to the government on this and the government had reacted positively to the industry’s anxiety.
But there is no clarity on this yet. With this issue still unresolved, it will be very difficult to broad-base the product, say industry insiders.
Interestingly, the working group, which the insurance regulator had formed to study the viability of the surety bond business, had recommended a robust legislation for surety bonds and other non-fund-based guarantees as a necessary condition for them to be introduced.
“Surety bonds may also be included in other Acts such as IBC, 2016, and given equivalent status as bank guarantees to ensure speedy and effective resolution and enforcement of indemnity by surety providers,” it had said.
Emails sent to SBI General Insurance and Tata AIG General Insurance did not elicit a response until the time of going to press.
A surety bond is a three-party contract. One party (the surety) guarantees the performance or obligations of a second party (the principal) to a third party (the obligee).
Under the product, surety insurance contracts can be offered to infrastructure projects of the government/private in all modes. Bid bonds, performance bonds, and maintenance bonds can be covered.
The product Bajaj Allianz is launching is looking at only road infrastructure contracts. According to the framework released by the insurance regulator earlier this year, the extent to which an insurer can underwrite the surety business should not exceed 10 per cent of its gross written premium, subject to a maximum of Rs 500 crore.
And, the limit of guarantee shall not exceed 30 per cent of contract value.
According to the regulator, insurers with 1.25x the solvency margin they are required to keep can commence the surety insurance business. The insurance regulator mandates insurance companies to maintain a solvency of 1.5x at all times.
In her Budget speech this year, Sitharaman had said that surety bonds can be used as a substitute for bank guarantees for government procurement to reduce the indirect cost for suppliers and work contractors. The insurance industry has hailed this as a very positive move, stating this will give a big boost to project financing with overall improvement in project viability.
Recently, the road transport and highways ministry had said it would launch the maiden surety bonds insurance product by general insurance companies for highway contractors on December 19.
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