Introduction

On 8 September 2021, the IRDAI had issued an "Exposure Draft on IRDAI (Surety Insurance Contracts) Guidelines 2021" (Draft Guidelines) with the objective of promoting and regulating surety insurance business in India, and invited comments from all stakeholders. Our views on the norms proposed under the Draft Guidelines may be viewed here. Pursuant to the comments received, the IRDAI notified "IRDAI (Surety Insurance Contracts) Guidelines 2022" on 3 January 2022 (Surety Insurance Guidelines), which shall come into force from 1 April 2022.

Surety Insurance Guidelines

A surety insurance contract is a contract of guarantee under §126 of the Indian Contract Act 1872. It is a contract to perform the promise, or discharge the liability of a third person in case of his default. The person who gives the guarantee is called the "surety"; the person in respect of whose default the guarantee is given is called the "principal debtor", and the person to whom the guarantee is given is called the "creditor"1. Surety insurance business has been classified under "Miscellaneous" line of insurance business2.

While most of the provisions under the Draft Guidelines have been retained in the original form, there are a few changes in the recently issued Surety Insurance Guidelines. The key differences are as follows:

  1. Only Insurers registered to transact general insurance business may offer surety insurance products. In this context, the Draft Guidelines proposed that: (i) those applicants for registration whose promoters are already engaged in carrying out surety insurance business in any jurisdiction shall be given preference3; (ii) an applicant who desires to register as specialized/monoline Insurer for offering surety insurance may also underwrite trade credit insurance subject to the IRDAI's guidelines in this regard4. However, the Surety Insurance Guidelines neither specify where any preference may be accorded nor allow such new category of insurers to write surety and trade credit insurance.
  2. While the Draft Guidelines proposed that Insurers may consider personal guarantees of promoters of principals/contractors as security for issuance of sureties5, the Surety Insurance Guidelines have omitted this suggestion. Further, the Surety Insurance Guidelines have expressly added that surety insurance contracts shall not cover financial guarantee in any form6.
  3. The Draft Guidelines expressly prohibited issuance of surety insurance contracts for credit enhancement of any financial instruments7. This has not been retained under the Surety Insurance Guidelines.
  4. The Draft Guidelines made express note of the IRDAI's powers to call, inspect or investigate documents etc, if it believed that: (i) an Insurer carrying on surety insurance business is acting in a manner likely to be prejudicial to the interests of policyholders; and (ii) continued writing of surety insurance business is detrimental to the financial soundness of the Insurer8. The Surety Insurance Guidelines do not make any express reference to such powers.

Inclusion of surety contracts under insurance has been deliberated for some time, and was sought by various market players in India. This was particularly prevalent in the construction/projects sector, where, until now, parties had to avail either bank guarantees (which involved certain collateralisation and commissions), or surety insurance offered by overseas insurance companies, which required separate regulatory approvals in India. While press reports indicate that the sector appears to have positively received the new Surety Insurance Guidelines, we understand that high incidence of defaults by contractors in India and relatively slow recovery mechanisms are expected by some stakeholders to remain the significant roadblocks in the implementation and operation of such surety products.

Footnotes

1. ¶4.1 of the Surety Insurance Guidelines.

2. ¶7.2 of the Surety Insurance Guidelines.

3. ¶3.3 of the Draft Guidelines.

4. ¶3.4 of the Draft Guidelines.

5. ¶6.2 of the Draft Guidelines.

6. ¶6.4(h) of the Surety Insurance Guidelines. In this regard, financial guarantee has been defined as follows:

"Financial Guarantee comprises of any bond, guarantee, indemnity or insurance, covering financial obligations in respect of any type of loan, personal loan and leasing facility, granted by a bank/credit institution, financial institution or financier, or issued or executed in favour of any person or legal entity in respect of the payment or repayment of borrowed money or any contract, transaction or arrangement, the primary purpose of which is to raise finance or secure sums due in respect of borrowed money."

7. ¶6.8(b) of the Draft Guidelines.

8. ¶12.1 of the Draft Guidelines.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.