Insurance regulator IRDAI has constituted a working group to study the suitability of insurers offering surety bonds for contractors.
The move follows Union Ministry of Road Transport and Highways requesting the regulator to examine the possibility of general insurers offering such bonds in view of COVID-19 pandemic and the consequent economic impact on liquidity and cash flow issues in the banking sector.
Such bonds guarantee satisfactory completion of a project by a contractor and provide performance security to various government agencies.
Currently, insurance companies do not offer the bonds for contractors.
Instead, lendersbanks have been issuing bank guarantees to contractors for fulfilling contract security and performance pledges.
The insurance legal/ regulatory framework does not permit underwriting of bonds that guarantee performance and bid securities as they are financial instruments and not conventional insurance products, an IRDAI communication on setting up of the nine-member working group said.
The group has been tasked with studying the Indian legal and regulatory framework with reference to surety bonds and assess suitability of the insurance industry or any other sector to offer such instruments. Headed by G. Srinivasan, director, National Insurance Academy, the group comprises senior executives of public and private insurers as well as officials of IRDAI. It has three months to submit the report.
