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General Insurers should be allowed in surety bond biz: Irdai working group

This is because surety bond insurance is yet to develop in India and risk exposure under this business is significant compared to other more mature lines of business



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A working group of the insurance regulator, tasked with giving recommendations on Indian offering surety bonds, has said insurers should be allowed to enter into surety bond insurance business with solvency margin above a certain threshold.

This is because surety bond insurance is yet to develop in Indian market and the risk exposure under this business is significant compared to other lines of business which are reasonably mature in Indian insurance market.

“If the insurer's solvency ratio falls below the specified threshold limit at any point in time, the insurer shall stop writing new surety bond business until its solvency ratio improves above the specified threshold limit,” the working group said in its recommendations.

A surety bond is a contract between three parties, wherein the third party provides financial guarantee on behalf of a seller/contractor to the buyer of his services. It is similar to bank guarantees.

The regulator may give specific approvals to insurers for issuance of sureties based on their capability to handle the business. According to the working group, the insurer should get capital relief to the extent the exposure is reinsured through the reinsurance structure.

It has also recommended that the exposure of an insurance company in the surety bond business needs to be regulated through a cap on its exposure under this business as a proportion of its net worth.

“It is emphasized that regulatory framework is extremely important for encouraging the surety business with recourse mechanism”, the working group said.

Furthermore, the board of the insurance company has to assess the company’s ability to retain the surety risks based on financial strength of the company. They also need to mandate appropriate reinsurance requirements to ensure that disproportionate surety risks are not written by the company. The board will need to conduct a review of the business on an annual basis.

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First Published: Fri, October 23 2020. 16:51 IST