Surety Bond Insurance

Surety Bond Insurance

Subject :Economy

Section: Capital Market

Context: The ambitious plan of the government to launch the Surety Insurance Bonds market – an alternative to bank guarantees in infrastructure projects — has failed to take off in the last three years due to technical and financial impediments

What is Surety Bond?

• Surety Bond is a three-party agreement that legally binds together a principal who needs the bond, an obligee who requires the bond and a surety company that sells the bond.
• Surety bonds provide financial guarantee that contracts will be completed according to predefined and mutual terms.
• Surety bond is provided by the insurance company on behalf of the contractor to the entity which is awarding the project. When a principal breaks a bond’s terms, the harmed party can make a claim on the bond to recover losses.
• It can effectively replace the system of bank guarantee issued by banks for projects and help reduce risks due to cost overrun, project delays and poor contract performance
• Surety bonds are mainly aimed at infrastructure development, mainly to reduce indirect cost for suppliers and work-contractors thereby diversifying their options and acting as a substitute for bank guarantee.
• Currently, Surety Bond for contractors is not being offered by insurance companies in the market to guarantee satisfactory completion of a project by a contractor and provide performance security to various government agencies

IRDAI guidelines for surety bonds:

• The premium charged for all surety insurance policies under written in a financial year, including all instalments 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 Rs 500 crore.
• The limit of guarantee should not exceed 30 per cent of the contract value. Surety Insurance contracts should be issued only to specific projects and not clubbed for multiple projects.