Rrajesh Sharrma, CEO and Principal Officer, Anand Rathi Insurance Brokers
Considering the size of the Indian economy, the market demand for surety insurance will be so huge, it can be another game-changer like agricultural insurance after the introduction of Pradhan Mantri Fasal Bima Yojana, if not for the additional solvency requirement and the cap on the premium per insurer (10% 0f GWP or Rs 500 crores) specified in the regulations.
The additional solvency requirement is excluding 4/5 private insurers and all but New India Assurance among PSUs from entering surety insurance
The Indian insurance regulator IRDAI’s launch of new regulations on Surety Insurance in January is only a re-introduction of an almost forgotten line of insurance business in India.
However, the fact remains that even earlier also the surety insurance contracts like performance and bid bonds were not as prevalent as in many foreign markets because Indian insurers issued these policies very sparingly, only as an obligation to very valued customers.
Considering the size of the Indian economy, the market demand for surety insurance will be so huge, it can be another game-changer like agricultural insurance after the introduction of Pradhan Mantri Fasal Bima Yojana, if not for the additional solvency requirement and the cap on the premium per insurer (10% 0f GWP or Rs 500 crores) specified in the regulations.
The additional solvency requirement is excluding 4/5 private insurers and all but New India among PSUs from entering surety insurance.
The underwriting of the surety bond business is an altogether different ball game because the traditional risk management concepts (which are predominantly of physical risks) are of little use.
Even earlier the investment departments of insurers were involved in deciding the issuance of bonds rather than their technical departments.
One requires a different breed of experts, who can successfully combine the financial risk analysis capabilities with traditional risk management techniques, with insurance playing a major role.
It will be interesting to watch whether the traditional underwriters will acquire the new skills required or the financial experts will drift to insurance.
Maybe, there is a scope for import of some experts to begin with. Even the regulator may require some specialists in their product approval team.
One of the basic concepts of insurance is subrogation. The possibility and probability of full or partial recovery of the claim amount from others is an important consideration in the rating of any proposal. Considering the state of the Indian judiciary system, one hopes the recovery aspect of surety insurance doesn’t turn out to be another case of marine losses recovery from transporters and logistics providers in India.
However, in case of surety insurance the principal debtor being the primary source of recovery, it gives bond seekers a good opportunity to develop and maintain a healthy relationship with their insurers to obtain very favorable terms on a long-term basis.
IRDAI’s special emphasis in provision 6.2 of regulations makes some interesting reading. Insurers are allowed to work together with banks, FIs, and contract awarding authorities. What shape this working together will take and what type of products the insurers will come up with in this regard is going to be interesting to watch.
Surety insurance is going to be an enormous opportunity for general insurers and brokers who are willing to take up the very unique challenges of a new line of business for which there is almost no exposure till now.