New Delhi, May 6 (PTI) The government's decision to allow surety bonds as substitute for bank guarantees in government procurement have opened a new avenue for the general insurance sector and will also help create cross-selling opportunities for the industry, said Bajaj Allianz General Insurance CEO Tapan Singhel.

Surety bonds contracts typically involve three parties – the Principal, the Contractor, and the Surety Provider, that is the insurance company. A surety bond is a risk transfer mechanism for the Principal and protects the Principal from the losses that may arise in case the contractor fails to perform its obligation.

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As per the guidelines by the regulator, all the general insurers who are registered under the Insurance Act, 1938 to transact in the business of general insurance are eligible to handle the business related to surety bonds.

"With Surety Bonds, there will be a new class of business for the general insurance industry. We are optimistic that this risk management tool will help the insurance industry grow thus increasing the insurance penetration in India. Surety Bonds business will also help create cross-selling opportunities for the industry," he told PTI.

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Unlike bank guarantees, Surety Bonds do not require security over assets and hence this will further increase trust in the insurance industry since the principal's loss gets covered which overall reduces the dependency on banks, he said.

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.

According to Singhel, the construction or infrastructure industries will also find relief and they would be able to bid for more projects as surety would help them with capital optimization, he said, adding, with the growth of this specialized class of business, employment opportunities will also increase multi-fold thus making a difference to society.

Through the surety bond, the surety provider assures the principal to pay the promised amount in case of default, thus assuming the obligations of the contractor if they are unable to fulfill their contractual requirement.

As per the Insurance Regulatory and Development Authority of India (IRDAI) guidelines, insurers can underwrite Surety insurance policies of not more than 10 per cent of the total gross written premium, subject to a maximum of Rs 500 crore in a financial year.

Additionally, insurers will have to work closely with banks and other financial institutions to acquire risk information, technical expertise to monitor projects, cash flow, and understand other aspects of the risk.

In the longer run, Singhel said, surety bonds will help fuel the infrastructural development of the country and will play an important role in nation building.

(The above story is verified and authored by Press Trust of India (PTI) staff. PTI, India’s premier news agency, employs more than 400 journalists and 500 stringers to cover almost every district and small town in India.. The views appearing in the above post do not reflect the opinions of LatestLY)