Insurance industry regulator IRDAI has floated draft guidelines on surety insurance contracts. Once implemented, it could address the high funding requirements of the construction and infrastructure companies.

A surety contract is a tripartite agreement among the debtor, creditor and the surety entity, in this case the insurance company, providing performance guarantee.

As per the draft guidelines, a general insurer maintaining a solvency margin of not less than 1.25 can underwrite a surety insurance business not exceeding 10 per cent of gross written premium subject to a maximum of Rs 500 crore in a financial year.

The insurers can work together with banks and other financial institutions to share risk information relating to contractor’s historical payment records with lenders, losses incurred, regularity of working capital account among others.

“Surety bonds are an efficient way of bidding/developing huge infrastructure projects. The guidelines permit insurers and surety solution companies to work along with other financial institutions to share risk, technical expertise and take part in large underwriting. The shared database of activities will also help mitigate any systemic risk to businesses,” said Vikash Khandelwal, CEO, Equaro Guarantees.

He added that once permitted this will enable the efficient use of working capital and obviate the need for collateralisation of bank guarantees thus releasing liquidity without compromising on risk mitigation.

The IRDAI has set September 28, 2021 as the deadline for submission of comments and suggestions on the draft guidelines.