Nitin Gadkari, Union Minister of Road Transport and Highways(Morth), will be formally launching the country’s first Surety Bond on Monday

Bajaj Allianz General insurance, with major reinsurance back ups from Munich Re and Swiss Re has already got its Surety Bond product approved by the IRDAI

New India Assurance, ICICI Lombard General Insurance and SBI General Insurance with the support of reinsurers are also in an advanced stage of launching their Surety Bonds

New Delhi:

Clearing the last hurdle for kick starting a huge Indian market for Surety Bonds, that will be issued by the some of the leading general insurers, the Insolvency and Bankruptcy Board of India(IBBI) has clarified that the insurers will be treated on par with banks as `secured creditors’ within the frame work of Insolvency and Bankruptcy Code (IBC) for recovering their dues.

This new decision was taken by the IBBI recently and addresses the concerns raised by the insurers that they should have a recourse to recovery on par with the banks in case of a default by the clients.

Effectively, it means the insurers like banks can drag an insured company to the National Company Law Tribunal for recovering their dues.

“This will remove uncertainty on the status of the insurer vs the bank. Its a welcome move To enable the financial system to get more efficient and will unlock banks capital for more credit related lending in a growing economy At the same time since insurers are likely to insure the project itself. They will have a better oversight and ability to underwrite the surety risk in the area of the construction risk,” said insurers

Nitin Gadkari, Union Minister of Road Transport and Highways(Morth), will be formally launching the country’s first Surety Bond on Monday.

As reported by the Asia Insurance Post earlier, Bajaj Allianz General insurance, with major reinsurance back ups from Munich Re and Swiss Re has already got its Surety Bond product approved by the IRDAI.

New India Assurance, the largest general insurer with the reinsurance support from Munich Re is also in an advanced stage of launching its Surety Bond products.

ICICI Lombard General Insurance, SBI General insurance and a few other general insurers along with French reinsurers SCOR also have started working on Surety Bonds.

 Sanjay Datta,chief, Underwriting, Claims and Reinsurance, ICICI Lombard general insurance, said, “We welcome the recent development on the government initiative to recognise insurers as financial creditors for pursuing recovery under surety contracts. This will surely encourage insurers to pursue surety bond business with much more confidence going forward as recovery rights were a major concern of reinsurers as well.”

ICICI Lombard General Insurance is working actively on its surety offering and hope to bring the product to the market soon.

“The market size for surety bonds will depend upon acceptability by both public and private beneficiaries and hence it is difficult to quantify the same currently. However, we feel there will be a decent sized market for surety within a couple of years as all stakeholders get more comfortable with the products, legal framework around surety and acceptability as an alternative to bank guarantees.”

Earlier, the insurance regulator IRDAI had taken up the issue of insurers being treated at par with banks with the government that finally has reacted positively to the concerns of the industry.

The general insurance industry wanted changes in Indian Contract Act and 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 by the clients

Though, the IRDAI earlier had issued guidelines so that insurers can start surety bond business from April 1 of this year, no insurers did that because their claims were inadmissible within insolvency laws which has now been amended.

In finance, a surety, Surety bond or guarantee involves a promise by one party to assume responsibility for the debt obligation of a borrower if that borrower defaults.

To support for the implementation of large scale project finance, particularly in the area 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.

The requirement has arisen because banks are not forthcoming as they were doing earlier to provide performance securities at the same cost.

Now, banks in some cases want 100 % margin money before issuing bank guarantees.

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 didn’t issue any Surety Bonds, as it wanted changes in the 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.

To start with performance bonds / surety bonds can be issued limited to the projects of National Highways Authority of India(NHAI) s only and not for all the contractors. The premium rate should be determined by a market agreement, an IRDIA panel earlier had recommended.

Highway sector is currently executing around Rs 5 lac crores projects at the moment and performance security varies to 5 % to 10 %, which this sector requires. The failure rate is less than 1 %. It is in very rare cases where performance security have been encashed.

A surety bond is a promise to be liable for the debt, default, or failure of another. It 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).

It is is defined as a three-party agreement that legally binds together a principal who needs the bond, an obligee who requires the bond and a surety company that sells the bond. If the principal fails to perform in this manner, the bond will cover resulting damages or losses.

For example, a contractor who is executing a NHAI projects has to submit a Surety Bond to it issued by a general insurer. A general insurer will charge a fee(premium) for issuing such a Surety bond to the contractor. Apart from fee, a general insurer will also ask for collaterals from the contractor to the proportion of the size of the Surety Bond. In turn, a general insurer will seek reinsurance support to cover over 97 per cent of the risks

Most of the construction companies apart from surety bonds also needs insurance for other areas as well and has a potential to become very large revenue pool for the insurance industry in future, said analysts.