The Ministry of Corporate Affairs is looking at making relevant changes to the Insolvency and Bankruptcy Code (IBC) to classify insurers as financial creditors in case of default of infrastructure projects, to grow the surety bond business.
The insurers have raised concerns that surety bonds which they issue should have recourse to recovery on par with banks, reported Press Trust of India.
The Department of Financial Services under the Finance Ministry is examining the issue and the relevant changes would be made in the IBC to grant financial creditor status to insurers in the resolution process.
With the change, insurers would be more encouraged to issue surety bonds. This would improve liquidity and capacity and strengthen the infrastructure sector.
Finance Minister Nirmala Sitharaman while presenting the Union Budget 2022-23, said that the use of surety bonds as a substitute for bank guarantees will be made acceptable in government procurement.
Other rules
As per IRDAI guidelines, insurers can underwrite surety insurance policies of not more than 10% of their total gross written premium, subject to a maximum of INR5bn ($60.15m) in a financial year.
Apart from this cap on surety business, insurers are required to maintain a solvency margin of 1.875 for the surety branch, compared to 1.5 for regular non-life insurance business.
Going by the data as of 31 March 2022, twelve out of the 25 general insurers in India are ineligible to write surety business because their solvency margins are less than 1.875. This includes all public-sector insurers who do not meet the solvency requirements. Even the national reinsurer, GIC Re, will not be able to reinsure this business, according to a study by the Insurance Resource Group (IRG).
“Since most insurers cede out a major part of the values at risk to reinsurers, using GWP as a measure of risk to cap the business needs to be re-looked,” said Sanjay Pande, senior associate at Insurance Resource Group.
