Insures should partner banks to issue Surety Bonds:IRDAI Panel
Instead of Insurance industry handling alone, a mechanism is required wherein the banking sector and the insurance sector could collaborate for sharing of customer information since banks have more experience in managing these types of risks, suggested the panel.. To start with performance bonds / surety bonds can be issued limited to the projects of NHAIs only and not for all the contractors. The rate should be determined by a market agreement, suggested the panel
A Working Group(WG),headed by former CMD of New India Assurance, G Srinivasan, on suitability of offering of Surety Bond bythe Indian insurance industry, has favoured such a move as it is a huge market that can be tapped by the isurance sector. .
The Surety bonds by insurance companies will provide an alternative option to bank guarantees, which can free contractor’s capital as they may not require ‘collateral’ Bank Guarantee is a big market and is totally controlled by banks today. From the insurer point of view this will be a new market in India, said the panel..
In India it is high time to provide this sort of product subject to regulatory provisions, said the panel.
Surety Bonds are proven risk management mechanisms with a long history that help ensure public and private owners execute their construction projects in accordance with the plans and specifications and ensure subcontractors and suppliers are paid. Surety bonds help provide owners of construction projects with guarantees of success and enhanced reputations, explained the panel. .
Surety, per se, is definitely not going to compete with banks but it will help as an additional facilityFrom costing perspective, the contractor can look at what is the more beneficial , BG or surety, based on his own analysis.
The WG has recommended that the IRDAI may issue separate guidelines to regulate the business of Surety Bond Insurance. The IRDAI may allow the insurers to enter into Surety Bond insurance business with solvency margin above a certain threshold
Instead of Insurance industry handling alone, a mechanism is required wherein the banking sector and the insurance sector could collaborate for sharing of customer information since banks have more experience in managing these types of risks, suggested the panel..
Subrogation and Reinsurance support have to be examined.
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.Highway sector is 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..
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 rate should be determined by a market agreement, suggested the panel
``It may be limited to only for performance guarantee i.e., project execution only. Maintenance aspects (for highways) which will come after completion of the project shall be treated as a separate annual contract with separate premium,''added the panel.
Specialist underwriters are required for dealing with Surety Bond.
However, it may not be a challenge for Indian context as engineering underwriters with financial knowledge can be trained as focus on assessing risk is largely on contractor’s profile, moral hazard, credibility and past performance.
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
It is recommended to have reinsurers supporting surety to have minimum A rating (S&P), or equivalent besides technical capabilities on underwriting, risk assessment, claims processes and portfolio monitoring of insurers and preferably with branch in India including IFSC, GIFT City. The Reinsurers offering such capacity should also be in a position to train the insurers on underwriting, risk assessment, claims processes and portfolio monitoring, said the panel..