The Insurance Regulatory and Development Authority of India ("IRDAI") vide Ref. No: IRDAI/NL/GDL/SIC/01/01/2022 dated 03.01.2022, in exercise of the powers conferred under section 14 (2) (i) of IRDA Act, 1999, has 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.
Effective date
These regulations shall come into force w.e.f. 01st April, 2022. The guidelines have been placed on the IRDAI website.
Applicability
The regulation shall be applicable to all Insurers registered under the Insurance Act, 1938, to transact the business of general insurance and Surety Insurance, subject to compliance with eligibility criteria as set out in these guidelines.
Key Highlights
- Surety bonds protect the beneficiary against acts or events that impair the underlying obligations of the principal.
- Surety insurance pertains to a contract to perform the promise or discharge the liability of a third person in case of default.
- Surety contracts may be in the form of Advance Payment Bonds, Bid Bond, Contract Bond, Performance Bond, Retention Money.
- The insurers will be required to have a board-approved underwriting philosophy for surety insurance business.
- Surety bonds protect the beneficiary against acts or events which impair the underlying obligations of the principal. Surety bonds guarantee the performance of a variety of obligations, from construction or service contracts, to licensing and commercial undertakings.
- The limit of guarantee should not exceed 30% of the contract value.
- The underwritten premium in a financial year for any general insurers from the surety insurance business shall not exceed 10 per cent of the total gross written premium subject to a maximum of Rs 500 crore.
- The contracts should not be issued where the underlying assets or commitment are/is outside the country.
- Surety Insurance products shall be subject to all provisions and relevant procedures of File & Use as stipulated under the Guidelines on Product Filing Procedures for General Insurance Products. The insurers shall market the Surety Insurance products only after the same has been filed and noted by the Authority.
- The data of Surety Insurance contracts underwritten by all general insurers shall be submitted to Insurance Information Bureau of India (IIBI) as may be prescribed. The insurers shall maintain the relevant records and data pertaining to Surety Insurance business and submit to the Authority as and when requisitioned.
- A surety bond is a three-party contract by which one party (the surety) guarantees the performance or obligations of a second party (the principal) to a third party (the obligee). The surety is provided by an insurance company on behalf of a principal or contractor to the obligee or government entity awarding the project.
- The surety insurance contracts can be offered to infrastructure projects of government/private in all modes.
- No person shall, after the commencement of these guidelines, transact the business of Surety Insurance in India unless the person is an Indian Insurance Company as defined in Section 2 (7A) of the Insurance Act, 1938.
- The surety insurance products shall be marketed only after the same have been filed and noted by the IRDAI.
- The Guidelines permit only general insurers registered with IRDAI to transact the Business, provided they comply with the eligibility criteria laid down in the circular issued by IRDAI (refer source).
Conclusion
The Authority, considering the specific nature of Surety Insurance owing to the unique risk and features of the products, hereby issues the following guidelines to regulate and develop Surety Insurance business. These guidelines will ensure orderly development of the surety insurance business and surety bonds market. The guidelines follows recommendations of a working group set up by the regulator to suggest steps to promote surety insurance business in the country.
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