India’s surety bond market fails to gain traction

India's surety bond market fails to gain traction

India’s surety bond market fails to gain traction | Insurance Business Asia

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India’s surety bond market fails to gain traction

Despite support from major insurers, the projects faced a lot of setbacks

Insurance News

Kenneth Araullo

The Indian government’s plan to introduce the surety insurance bonds market as an alternative to bank guarantees in infrastructure projects has faced setbacks over the last three years due to technical and financial challenges, according to experts and insiders.

Since the launch of two fundamental surety bonds (bid bonds) by Nitin Gadkari, union minister of the Ministry for Road Transport and Highways (Morth), in December 2022, the market in India has made no progress, according to insurance sources.

Despite leading general insurers like New India Assurance, ICICI Lombard General Insurance, SBI General Insurance, and Bajaj Allianz General Insurance announcing their intentions to issue surety bonds, they have been unable to do so due to a lack of supporting elements.

The process of obtaining IRDAI’s approvals for surety bonds products has taken nearly three years, an article from The Indian Express reported. While technicalities have been addressed to make road projects less risky and ensure Surety Bonds become a safe and profitable business for insurers, the absence of supporting elements remains a challenge.

Nodal minister Nitin Gadkari, keen on developing the market as an alternative to bank guarantees for executing large projects, is persistently pursuing the matter with the Ministry of Finance. The ministry is also urging IRDAI to encourage the insurance industry to launch surety bond products.

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Addressing the surety bond flop

Recently, a meeting was held with key stakeholders to discuss the development of a surety bond market in the country. However, leading foreign reinsurance branches (FRBs) involved in designing surety bond products for the Indian market have stated that buyers are unwilling to pay adequate premiums and provide collateral for the policy, crucial for selling surety bonds.

This stalled market requires extensive reinsurance support, and no primary insurers can issue any policy without proper reinsurance backup. There are expectations in the Indian market that surety bonds should be cheaper than bank guarantees, but this is not sustainable for insurers.

Additionally, issues related to pricing and reinsurance options, along with lack of clarity on indemnity documents, further hinder progress in this area. The Indian Contract Act and Insolvency and Bankruptcy Code do not recognize the rights of insurers at par with financial creditors.

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