After Bajaj Allianz, New India Assurance gets into surety bonds business

Surety bonds can help smaller infra developers compete with larger, more established ones for bigger contracts, the company said

The country’s largest general insurer, New India Assurance, has become the second insurance company to get into the surety bonds business, which is being pushed by the central government as an alternative to bank guarantees for government procurement.

Last November, private sector general insurer Bajaj Allianz General Insurance was the first in its space to get into this business. There were talks of two other private sector insurers getting into the business. However, so far, none of the companies have made any official announcement on this.

Surety bonds are legally enforceable tripartite contracts that guarantee compliance, payment and/or performance. They indemnify the client against damages resulting from non-performance.

Essentially, the insurer provides an underwriting guarantee for a premium, against default in execution of a project. One party (the surety) guarantees the performance or obligations of a second party (the principal) to a third party (the obligee).

Under the product, surety insurance contracts can be offered to infrastructure projects of the government/private sector in all modes. Bid bonds, performance bonds, and maintenance bonds can be covered.

According to experts, surety bonds are work well for small businesses as the collateral requirements of insurance companies are usually lower than bank guarantees.

The authorities issuing the contracts--usually the government--are generally hesitant to deal with smaller contractors as they are apprehensive about timely delivery. When a contractor furnishes a surety bond, the authority will readily consider him, as the bond indemnifies him to the extent of the amount insured. in case the contractor does not meet the performance requirement set by the authority. Hence, surety bonds can help smaller infrastructure developers compete with larger, more established ones for bigger contracts, the company said in a statement on Friday.

“Surety bonds will soon revolutionise the dynamics of India’s infrastructure industry. Surety bond Insurance will act as a security shield for infrastructure projects and protect the interests of both the contractor and the principal. In today’s increasingly uncertain and volatile business environment, our surety bonds will provide much-needed financial reassurance to all parties involved in infrastructure projects. Going forward, we believe that surety bonds will drive India’s infrastructure push”, said Neerja Kapur, Chairman cum Managing Director, New India Assurance.

The insurance regulator had, in January 2022, evolved a framework for the development of the surety insurance business in the country, which came into effect on April 1, 2022. It allowed Indian general insurers to commence surety insurance business if they had 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.

According to the framework released by the insurance regulator, the extent to which an insurer can underwrite the surety business should not exceed 10 per cent of its gross written premium, subject to a maximum of Rs 500 crore. And the guarantee shall not exceed 30 per cent of contract value.

Interestingly, the finance minister in her last budget (2022) speech had said that surety bonds can be used as substitutes to bank guarantees for government procurement, in order to reduce the indirect cost for suppliers and work contractors.

That said, insurers have been demanding changes to the Indian Contract Act and the Insolvency and Bankruptcy Code (IBC) to bring surety bonds on a par with bank guarantees when it comes to recourse available to them in case of default to broad base the product.

The insurance regulator was said to have reached out to the government on this and the government had reacted positively to the industry’s concerns. But there seems to be no clarity on this aspect yet.