IRDAI (Surety Insurance Contracts) Guidelines, 2022

The Insurance Regulatory and Development Authority of India (“IRDAI”) recently issued the IRDAI (Surety Insurance Contracts) Guidelines, 2022 (“Guidelines”) to regulate the business of surety insurance (“Business”) in view of the unique risks and features of surety insurance. The Guidelines shall be enforced from 1 April 2022.

Surety insurance contract (“Contract”) is a contract of guarantee under section 126 of the Indian Contract Act, 1872 to perform the promise, or discharge the liability of a third person in case of his default. Under the Guidelines, a contract of surety shall be deemed to be an insurance contract only if made by a surety which is registered with the IRDAI as a general insurer. As such, the Guidelines permit only general insurers registered with IRDAI to transact the Business, provided they comply with the following eligibility criteria:

1. Maintain solvency margin of not below 1.25 times of the control level of solvency specified by the IRDAI.
2. Premium charged for surety insurance policies underwritten in a financial year including the instalments due in subsequent years, shall not exceed 10% of the total gross written premium of that year, subject to maximum of Rs. 500 crores.
3. Have a Board approved underwriting philosophy, adequate competence and underwriting skills, risk management and required infrastructure for underwriting.
4. Risk management mechanism / internal risk management guidelines to evaluate financial / technical strength of principle before and after the underwriting the Business.
5. Comply with specific conditions imposed by IRDAI.

The Guidelines provide six types of Contracts: Advance Payment Bond, Bid Bond, Contract Bond, Customs and Court Bond, Performance Bond and Retention Money. An insurer shall comply with, inter alia the following underwriting requirements:

1. Contracts may be offered to Government / Private infrastructure projects
2. The Contract Bonds may include Bid Bonds, Performance Bonds, Advance Payment Bond and Retention Money. Insurers may also underwrite Customs or Tax Bonds and Court Bonds.
3. The limit of guarantee shall not exceed 30% of the contract value.
4. The Contracts shall be issued only to specific projects and not be clubbed for multiple projects.
5. Insurer cannot issue the Contracts on behalf of its promoters/ their subsidiaries, groups, associates and related parties.
6. The Contracts shall not cover financial guarantee in any form.
7. The underlying assets / commitment of the Contracts should not outside India and the payment of risk should be made in Indian currency.

Further the Guidelines mandate that surety insurance products shall be marketed only after the same have been filed and noted by the IRDAI. Further, the data of the Contracts is required to be submitted to Insurance Information Bureau of India, as prescribed. Furthermore, the insurers shall maintain the relevant records and data related to the Business and provide the same to the IRDAI when required.

In our view, surety insurance shall prove to be beneficial to the Indian infrastructure sector which is susceptible to delays and defaults and will assist the contractors by enabling them to utilize their capital efficiently.