Challenges in Surety Insurance Contracts:
The government had suggested implementing Surety Insurance Contracts (SICs) as an alternative to traditional bank guarantees for business ventures and projects. However, insurers face challenges, including a higher insolvency margin requirement and a cap on the share of Gross Written Premium (GWP) when providing SICs.
In a bid to reduce indirect costs for suppliers and contractors, the Finance Minister, during her FY23 Budget speech, announced that surety bonds would be accepted as a substitute for bank guarantees in government procurements.
While regular insurers are mandated to maintain a solvency margin of 1.5 in their routine operations, those offering SICs must adhere to a higher solvency margin of 1.875. India has twenty-five insurers registered with the insurance regulator for non-life insurance business.
Based on data as of March 31, 2022, twelve out of these twenty-five insurers would be ineligible to underwrite SICs due to their solvency margins falling short of 1.875. This includes all four public sector insurers, which fail to meet the solvency requirements. Even the national reinsurer, GIC Re, would be unable to reinsure the SIC business, according to a study conducted by the Insurance Resource Group (IRG). The study recommends that the regulator explore the possibility of treating the SIC business as a quasi-independent Strategic Business Unit (SBU) within an insurance company. This would involve a separate allocation of assets and liabilities and a standalone solvency requirement.
The Gross Written Premium (GWP) from SICs is capped at 10 percent of an insurer’s total GWP in a year, with a maximum limit of Rs 500 crore. Sanjay Pande, senior associate at Insurance Resource Group, emphasizes that the use of GWP as a measure of risk to limit business sourced from SICs should be reevaluated, given that insurers often reinsure a significant portion of the risk to reinsurers.
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