IRDAI guidelines on Surety Insurance

The IRDAI recently issued guidelines for surety insurance. Under the guidelines, the Insurance Regulatory and Development Authority of India has capped the surety insurance to 10% of the premium. And the maximum threshold was set to five hundred crores of rupees.

What is surety insurance?

Surety insurance are guarantees without collateral. It protects the lender against default by contractor, failure of projects or poor services.

IRDAI (Surety Insurance Contracts) Guidelines 2022

The guidelines say that the surety or guarantee shall not exceed 30% of project value. Only the insurance registered under the Insurance act shall issue surety insurance. The company issuing surety insurance should fulfil the following conditions:

  • Solvency margin of the company should be 1.25 times or more.
  • The risk assessment and the financial strength of the client should be evaluated
  • The guarantee cannot be clubbed for multiple projects. One guarantee for one project

How does a surety insurance work?

It is an agreement signed between insurance company, contractor (debt receiver) and the oblige (awarding authority like that of a government company). Under the agreement, the insurance company promises that it will pay the balance amount if the debtor fails to adhere to the terms (or fails to pay). There are different types of surety insurance. They are contract bond, advance payment bond, Bid bond, customs and court bond, performance bond and retention money.

Why is surety insurance important to India?

  • India has plans to invest five lakh crores of rupees in building roads in the near future.
  • The Gati Shakti Project aims to develop infrastructure worth 100 lakh crores of rupees in the country. The sector is prone to cost overruns. This is mainly due to delays in implementing the project.
  • Surety bonds are popular in international market. Therefore, is seen as a welcoming step by foreign investors. Countries such as US, Canada, Australia, European countries and New Zealand are already offering surety insurance or surety bonds. The culture is slowly spreading in southeast Asia and Africa.

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