Guarantees blocked: Irdai asked to propose a model product
In order to break the impasse on the launch of surety bonds, the Ministry of Road Transport and Highways (MORTH) has asked the insurance regulator IRDAI to develop a model product on surety bonds in consultation with general insurers.
Road Transport Minister Nitin Gadkari had met CEOs of some general insurance companies as well as SN Rajeswari, Member-Distribution, and acting in charge of Non-Life, IRDAI, in New Delhi to resolve some legal and technical issues which prevent general insurers from issuing bonds, which can replace costly bank guarantees. All the macro rules and regulations prepared by the Indian government and IRDAI were already in place since April 1.
The minister, who discussed several difficult issues that made bonding a complete failure with the insurers, proposed to IRDAI to design a model product having all the basic characteristics that can be given to them for its launch. “Insurers can still improvise the product depending on their capacity and based on reinsurance support,” said the CEO of a general insurance company, who had attended the meeting.
A bond is provided by the insurance company on behalf of the contractor to the entity awarding the project. When a principal breaches the terms of an obligation, the aggrieved party can make a claim on the obligation to recover losses.
The issue of amendments to Indian contract law and the Insolvency and Bankruptcy Code (IBC) desired by general insurers – so that surety bonds can be on the same level as bank guarantees as far as recourse is concerned available to them in the event of default – are also under consideration, but the launch of bonds should not completely wait for that, he said.
Anjan Dey, CMD, Oriental Insurance Company, Prakash Chandra Kandpal, MD and CEO of SBI General and Ritesh Kumar, MD and CEO, HDFC Ergo had attended the meeting.
Aiming to support the implementation of large-scale project finance especially in the area of National Highway Authority of India (NHAI) road projects, Finance Minister Nirmala Sitharaman in her Union Budget 2022- 23, said that bidders for government projects could provide bonds instead of much more expensive bank guarantees, thereby improving the viability of their bid.
After the Union budget, IRDAI had published the detailed standards on the issuance of bonds by general insurers. However, the general insurance industry wanted changes to the Indian Contracts Act and the Insolvency and Bankruptcy Code (IBC) so that surety bonds could be on par with bank guarantees with respect to the remedies available to them in the event of default.
“As surety is an entirely new line of business, insurance companies would need clarity on various aspects such as pricing, remedies available against defaulting contractors, reinsurance options and global best practices” , said an official. “As an industry, we urge regulators to facilitate changes in laws such as the Indian Contracts Act and the IBC and to put surety bonds on par with bank guarantees regarding remedies available to issuers. . This will help the industry approach bonding solutions with much more confidence, but it will be even more of a viable proposition for all stakeholders,” he said.
Officials said a huge market is available for surety bonds in the country and it is now up to the insurance fraternity to come up with products quickly. “It is incumbent on the insurance fraternity to get products out quickly. We have already started discussions at authority level with agencies and insurance companies,” they said.
The big challenge for new players is that they often find it difficult to obtain bank guarantees and this is where the role of surety bonds comes in. The government has planned investments worth Rs 7 trillion for infrastructure projects to be spent over the next 2-3 years. .