Debasish Panda, Chairman, Insurance Regulatory and Development Authority of India
Debasish Panda, Chairman, Insurance Regulatory and Development Authority of India | Photo Credit: PTI

Insurance sector regulator, IRDAI Chairman Debasish Panda on Thursday hinted at bringing more changes in the proposal for surety bonds inorder to address some of its “pain points”.

Finance Minister Nirmala Sitharaman in her budget speech for 2022-23 had said that to reduce indirect cost for suppliers and work-contractors, the use of surety bonds as a substitute for bank guarantee will be made acceptable in government procurements. Businesses such as gold imports may also find this useful. IRDAI has given the framework for issue of surety bonds by insurance companies.

Risk transfer tool

Surety bond insurance is a risk transfer tool for the principal and shields the principal from the losses that may arise in case the contractor fails to perform their contractual obligation. The product gives the principal a contract of guarantee that contractual terms and other business deals will be concluded in accordance with the mutually agreed terms. On Wednesday, Road Minister Nitin Gadkari said the finance ministry has agreed to allow contractors engaged by state — owned NHAI and NHIDCL to convert their bank guarantees to insurance surety bonds from retrospective effect.

On Thursday, Panda said that the regulator has tried to address some of the pain points. “In case there is need for some tweaking, we will consider. Let industry come up with suggestions, we will examine them,” Panda told reporters on the sidelines of a conference organised by industry body CII here.

Replying to a suggestion on surety bonds made during the conference, Panda said Irdai has been working closely with insurers on it. “One of them (pain points) we have recently removed. There was an additional layer of solvency requirements which we have removed now. So from our side, I think we have done whatever we thought was appropriate. But I’m absolutely open to any more suggestions, which will help this market grow and also help our infrastructure grow in this country,” he said.

As per a circular issued by the Insurance Regulatory and Development Authority of India (IRDAI), the solvency requirement applicable for such products has now been reduced to control the level of 1.5 times from 1.87 times previously prescribed. Further, the prevailing 30 per cent exposure limit applicable on each contract underwritten by an insurer has also been removed. The changes are aimed at expanding the surety insurance market by increasing the availability of such products. The regulator had issued IRDAI (Surety Insurance Contracts) Guidelines’ in January 2022.

Earlier, addressing the conference, Panda said that authority is also working on creating a UPI-like moment for insurance. This is being proposed through the Bima trinity — Bima Sugam, Bima Vistar and the woman-centric Bima Vahak. Further, to reach the last mile, a state-level insurance plan is being proposed, limits on subordinate debt have doubled and exposure to the BSFI sector has increased, which would help in achieving insurance for all by 2047.