Surety Bonds market fails to kick off

While some of the leading general insurers like New India Assurance, ICICI Lombard General Insurance, SBI General Insurance and Bajaj Allianz General Insurance have announced their plans to issue Surety Bonds in recent months, nobody has been able to do so due to lack of supporting elements.

“It has taken almost three years to get IRDAI’s approvals for Surety Bond product. We have sorted out a lot of technicalities which will make constructing road projects less risky that make Surety Bond a safe and profitable business for insurers. The Surety Bond will also help contractors to have financial closure of their projects without depending upon only bank guarantees,’’ Gadkari had said while launching the first two Surety Bond products last year.

Gadkari, whose ministry is nodal body for implementing the mega infra projects, is keen on developing the Surety Bonds market as an alternative to bank guarantees for executing large projects, is still pursuing the matter with the Ministry of Finance which is putting pressure on IRDAI to push insurance industry to launch products.

IRDAI Chairman Debasish Panda and Rakesh Joshi, Member (Finance & Investment), IRDAI had met and tried to resolve major issues faced by re-insurers last week at a meeting called by CII. Panda had urged all the stake holders to work collaboratively within the existing regulatory framework to develop a much-needed Surety Bonds market to aid the government’s big push in the Rs 100 trillion infrastructure space.

The meeting was participated by key stakeholders, including senior officials from Ministry of Finance, National Highways Authority of India (NHAI), representatives from several insurance companies, reinsurance companies, the World Bank, other public and private banks, infrastructure companies and insurance brokers, on how to develop an appropriate Surety Bond market in the country.

However, leading foreign reinsurance branches (FRBs), which have taken a lead in in designing Surety Bond products for the Indian market have said buyers are not prepared to pay the adequate premium and provide collateral for the policy without which nobody can sell Surety Bonds.

Surety Bonds need extensive reinsurance support and no primary insurers can issue any policy without proper reinsurance back up. “There are expectations in the Indian market that Surety Bonds should be cheaper than cost of bank guarantee which no way can happen. If we undercut banks on pricing – then we are ending in a situation which would really be unsustainable for us,” FRB sources said.

Apart from pricing, there is also no clarity on reinsurance options due to current provisions around indemnity document. Indian Contract Act and Insolvency and Bankruptcy code does not recognize rights of Insurers at par with financial creditors yet and thus insurance companies do not have recourse to recovery like banks in case of any default, industry sources said.

In India, the issuer of Surety Bonds should be in a position to legally enforce tripartite contracts that guarantee compliance, payment and/or performance, sources said.

The government has already announced Surety Bonds, but the implementation can be faster. Surety Bonds have a robust $20 billion market in advanced economies, and it is about time they were widely used in India, according to an insurance expert.

“India is expected to spend around Rs 100 trillion on infrastructure through the National Infrastructure Pipeline in the next five years. This requires bank guarantees of approx Rs 90 lakh crore in the next five years which banks currently do not have capacity for. This is where surety bonds need to step in as a complement to bank guarantees with India estimated to be the third largest country with infrastructure activity by 2030,” Panda said.

What’s Surety Bond?

Surety Bonds are a type of insurance policy protecting parties involved in a transaction or contract from potential financial losses due to a breach of contract or other types of non-performance. The issuing insurer provides guarantee, for a premium, in the case of a default in execution of a project. They serve as a risk mitigation tool for maintaining integrity, quality, and adherence to contractual terms, ultimately contributing to the smooth functioning of projects especially in infrastructure sector and fostering a healthy business environment.