The Insurance Regulatory and Development Authority of India (Irdai) has decided to lower the solvency requirement for surety bonds to 1.5 times, from 1.875 times after receiving feedback from the insurance players.
“On the basis of the evaluation of various representations received, the solvency requirement applicable for such products has been reduced to control level of 1.5 times from 1.875 previously prescribed,” the regulator said in a press release.
“Further, the prevailing 30 per cent exposure limit applicable on each contract underwritten by an insurer, has also been removed. These amendments follow the earlier notification removing the cap on premiums that could be underwritten in a financial year by mono-line insurers transacting only Surety Insurance Business,” Irdai said.
The insurance regulator in January 2022 had come out with a framework for development of surety insurance business in the country, which came into effect from April 1, 2022. Irdai allowed the Indian general insurers to commence surety insurance business, if they have 1.25 times the solvency margin they are required to keep. The insurance regulator mandates insurance companies to maintain solvency of 1.5 times at all times.
Irdai said the current revisions are aimed to expand the surety insurance market by increasing the availability of such products and creating the opportunity for more insurers to service the increasing demand from various sectors of the economy.
“Surety insurance will increase liquidity of contractors and provide strong boost especially to the infrastructure sector,” it said.
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Surety bonds are a type of insurance policy protecting parties involved in a transaction or contract from potential financial losses due to a breach of contract or other types of non-performance.
Essentially, the insurance company provides an underwriting guarantee for a premium in case of a default in execution of a project. One party (the surety) guarantees the performance or obligations of a second party (the principal) to a third party.
These products serve as a risk mitigation tool for maintaining integrity, quality, and adherence to contractual terms, ultimately contributing to the smooth functioning of projects especially in the infrastructure sector.