The country’s first ever ‘Surety Bond Insurance’ product developed by Bajaj Allianz General Insurance, a private general insurer, was launched by Nitin Gadkari, Union Minister of Road Transport & Highways, on Monday.

Surety Bond Insurance — which will help replace bank guarantees — is expected to optimise capital for contractors while giving a fillip to the country’s infrastructure sector.

Infrastructure development

This product launch is in line with the Government’s vision to up-scale the infrastructure development in the country.

In Budget 2022-23, Finance Minister Nirmala Sitharaman announced that Surety Bond Insurance would be allowed as a substitute for bank guarantees in case of government procurement and also for gold imports. 

Surety Bond Insurance, which is mainly aimed at infrastructure development, is a risk transfer tool that 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. In case the contractor doesn’t fulfil the contractual terms, the principal can raise a claim on the Surety Bond and recover the losses they have incurred. 

Facilitating growth

Unlike a bank guarantee, the Surety Bond Insurance does not require large collateral from the contractor, thus freeing up significant funds for the contractor, which can be utilised  for the growth of the business. 

The product will also help in reducing the contractors’ debts to a large extent. The product will facilitate the growth of upcoming infrastructure projects in the country.

Nitin Gadkari, Minister of Road Transport & Highways, Government of India, said “India is well on its path to becoming a $5 trillion economy. Insurance  will play an important role in this growth. To realise this dream, it is important that infrastructure projects are executed at a faster speed. With this new instrument of Surety Bonds, the availability of both liquidity and capacity will be boosted. Such products stand to strengthen the sector. 

We are confident that expanding our road network will lead to more prosperity, increased employment opportunities, and increased social connectivity. Surety Bond Insurance is the right step in this direction”.

Optimise capital

Tapan Singhel, MD & CEO, Bajaj Allianz General Insurance said Surety Bond Insurance will prove to be an effective tool for the industry and will allow contractors to take up more projects as the product will help them optimise capital. 

“As this specialised class of business grows, employment opportunities will increase multi-fold, thus benefiting society. The current government is leaving no stone unturned to improve the country’s infrastructure, and we are keen to contribute to the efforts of the government and be a part of the growth story ”, he said.

 The Surety insurance business will assist in developing an alternative to bank guarantees for construction projects. This would enable the efficient use of working capital and reduce the requirement of collateral to be provided by construction companies.

The IRDAI has said the premium charged for all surety insurance policies underwritten in a financial year, including all installments due in subsequent years for those policies, should not exceed 10 per cent of the total gross written premium of that year, subject to a maximum of ₹500 crore.

Provide assurance

IRDAI has allowed insurers to issue contract bonds, which provide assurance to the public entity, developers, subcontractors and suppliers that the contractor will fulfil its contractual obligation when undertaking the project. The contract bonds may include Bid Bonds, Performance Bonds, Advance Payment Bonds and Retention Money bonds. 

IRDAI norms also stipulate that the limit of guarantee should not exceed 30 per cent  of the contract value. Also Surety Insurance contracts should be issued only to specific projects and not clubbed for multiple project.

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