Surety Bonds Could Be The Next Growth Segment For General Insurers, Says IRDAI Chairman

The Insurance Regulatory and Development Authority of India said surety bonds should be a complementary instrument to bank guarantees in India's infrastructure push.

The current regulatory framework around surety bonds offers the general insurance industry an opportunity to diversify the portfolio and play an important role in nation-building, said Chairman Debashish Panda in a statement issued on Tuesday.

Surety insurance bonds are essentially guarantees without collateral that protect the awarding authority, such as the government, from poor service, failure to complete a project, or default by the contractor. And such instruments also help construction contractors make efficient use of their working capital as well as ensure greater liquidity.

The Confederation of Indian Industry conference held in New Delhi focused on the financing of infrastructure projects in the country as part of the massive push for the sector by the Government of India, which allocated Rs 10 lakh crore towards it in the Union Budget 2023.

Panda highlighted that India is expected to spend approximately Rs 100 lakh crore on infrastructure through the National Infrastructure Pipeline in the next five years. This would require bank guarantees of approximately Rs 90 lakh crore in the next five years, which banks currently do not have the capacity for. This is where surety bonds can complement bank guarantees, as India is estimated to be the third-largest country with infrastructure activity by 2030.

With such a large market potential, the IRDAI Chairman exhorted all the stakeholders to come together and reap the potential that this segment offers.

He highlighted the guidelines the regulator has issued since last year on surety bonds. The final guidelines removed restrictions on business to be underwritten, relaxed solvency margin requirements, allowed insurance for commercial and contractual surety, and removed the limit of guarantee with the aim of giving a boost to the business of surety insurance.

However, so far, the penetration of surety bonds in India has been low, with only a handful of companies offering this unique tripartite agreement for infrastructure. Since these bonds are without collateral, a thorough screening of the contractor needs to be done, and insurers may be required to set up separate teams to vet the principal debtor.

Vinayak Chatterjee, founder and managing trustee of The Infravision Foundation, advocated a structure where traditional banking and the insurance sector could work in partnership with each other. Globally, in advanced economies, surety bonds have a robust $20 billion (around Rs 16,000 crore) market, he said.