Irdai committee to examine surety bonds for road contracts
Currently, surety bonds for contractors is not being offered by insurance companies
Taking cue from a proposal from the Ministry of Road Transport and Highways, insurance regulator Irdai has formed a panel under G Srinivasan, director, National Insurance Academy, to assess the suitability of the Indian insurance industry or any other sector to offer surety bonds for road contracts in the country.
Currently, surety bonds for contractors is not being offered by insurance companies in the market to guarantee satisfactory completion of a project by a contractor and provide performance security to various government agencies.
Surety bond is a three-party agreement that legally binds together a principal who needs the bond, an obligee who requires the bond and a surety company that sells the bond. Surety bonds provide financial guarantee that contracts will be completed according to pre-defined and mutual terms. When a principal breaks a bond’s terms, the harmed party can make a claim on the bond to recover losses.
Due to the pandemic and consequent economic impact on liquidity and cash flow issues in the banking sector, the Road Transport Ministry had requested Irdai to examine the possibility of offering surety bond by the general insurance companies. The current insurance legal/regulatory framework does not permit underwriting of bonds that guarantee performance and bid securities as they are financial instruments and not conventional insurance products.
Banks have been issuing bank guarantees to contractors for fulfilling contract security and performance pledges. Some other members of the panel are: Hitesh Kotak, CEO, Munich Re, India; Shankar Garigiparthy, CEO, Lloyd’s India; Neelesh Garg, CEO, Tata AIG General Insurance; Roopam Asthana, CEO, Liberty General Insurance and SN Jayasimhan, general manager, Investment Department, Irdai.
Irdai wants the group to make its recommendations within three months.