IRDAI tweaks surety insurance norms for more products, players

Insurance regulator IRDAI has introduced changes to Surety insurance guidelines on solvency margin and exposure limit with an aim to expand the market, increase availability of such products and encourage more insurers to foray into the segment.

“Solvency requirement applicable for such products has been reduced to control level of 1.5 times from 1.875 previously prescribed. The existing 30% exposure limit applicable on each contract underwritten by an insurer has been removed,” the regulator said in a circular on the revised norms that came into force immediately.

Promoted as an alternative to bank guarantee, surety bond is a type of insurance policy that protects parties in a transaction or contract from potential financial losses due to a breach of contract or other types of non-performance. “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,” the regulator said.

Welcoming the change to the solvency requirement, a senior level executive in a private general insurer said the relaxation was likely to make more insurance companies qualify to underwrite the policies. The market potential is big and with more awareness, especially among government agencies engaged in infrastructure development, bound to benefit contractors, particularly those leveraged and facing challenge with collaterals insisted upon for bank guarantees. Opting for the insurance cover will free up funds for such contractors.

Over time, surety insurance will also make sense for contractors engaged in private sector, he said. Another factor likely to make surety insurance popular is the limitations for banks in terms of the exposure they can take to a particular contractor, he said.

IRDAI said the latest amendments follow an earlier notification removing the cap on premiums that could be underwritten in a financial year by insurers transacting only surety insurance business.”