Irdai examining feasibility of insurers offering surety bonds for road contracts

Regulator Irdai has decided to examine the feasibility of introducing surety bonds by insurance companies for road contracts in the country.

In the wake of the COVID-19 pandemic and its subsequent economic impact on liquidity and cash-flows in the Indian banking sector, the Ministry of Road Transport and Highways (MoRTH) had requested the regulator to examine possible offering of surety bonds by the general insurance companies.

Now, the Insurance Regulatory and Development Authority of India (Irdai) has set up a nine-member working group to study the legal framework and suitability of the Indian insurance industry or any other sector to offer such bonds.

Headed by G Srinivasan, Director, National Insurance Academy, the group comprises members from public and private insurance companies and Irdai, the sectoral regulator said in a circular.

Currently, surety bond for contractors is not being offered by insurance companies in the Indian market. The bonds guarantee satisfactory completion of a project by a contractor and providing performance security to various government agencies.

The 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.

Hitherto, the banks have been issuing bank guarantees to contractors for fulfilling contract security and performance pledges, Irdai said.

The panel has been asked to study the current Indian legal and regulatory framework with reference to surety bonds and assess the suitability of the Indian insurance industry or any other sector to offer such bonds.

In its report to be submitted in three months, the panel is also expected to provide justification for the recommendations being made by the group, with special reference to the legal and regulatory perspective.

The working group may have its meetings through online mode in view of the COVID-19 pandemic, Irdai said