Irdai wants insurers at par with banks on legal recourse for surety bonds

The insurance regulatory and development authority of India (Irdai) has taken up the issue of insurers being treated at par with banks when it comes to recovery recourse available to them for the surety bond business and the government has reacted positively to the concerns of the industry, said TL Almelu, member, Non-Life, Irdai.

Speaking at a seminar organised by National Insurance Academy, Alamelu said, “Recently we had come with surety bond guidelines for which there is huge demand. However, we do understand the concerns raised by the insurers that they should have a recourse to recovery on par with the banks. This aspect has been taken up with the government and I can tell you that they have reacted extremely positively on the issue of trying to keep insurers at par with banks in the IBC code."  

The general insurance companies are seeking changes in Indian Contract Act and Insolvency and Bankruptcy Code (IBC) to bring surety bonds at par with bank guarantees when it comes to recourse available to them in case of a default.

The finance minister in her Budget speech this year had said that surety bonds can be used as a substitute for bank guarantees for government procurement in order to reduce the indirect cost for suppliers and work contractors. The insurance industry had hailed this as a very positive move as this will give a big boost to project financing with overall improvement in project viability.

However, insurers are seeking legal recourse against defaulting contractors to whom the surety bonds are issued. Interestingly, the working group, which the insurance regulator had formed to study the viability of the surety bonds business, had recommended a robust legislation for surety bonds and other non-fund-based guarantees as a necessary condition for them to be introduced.

“Surety bonds may also be included in other Acts such as Insolvency and Bankruptcy code, 2016 and given equivalent status as bank guarantees to ensure speedy and effective resolution and enforcement of indemnity by surety providers”, it had said.

A surety bond 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).

The insurance regulator in January this year had come out with a framework for development of surety insurance business in the country, which will come into effect from April 1, 2022, that allows Indian general insurers to commence surety insurance business, if they have 1.25 times the solvency margin they are required to keep. The insurance regulator mandates insurance companies to maintain solvency of 1.5x at all times.