Introduction
Overview of 2022 Guidelines
Comment
On 1 April 2022, the Insurance Regulatory and Development Authority (IRDAI) (Surety Insurance Contracts) Guidelines 2022 came into force. The 2022 Guidelines follow the issuance of the Exposure Draft on IRDAI (Surety Insurance Contracts) Guidelines 2021 on 8 September 2021, which aimed to promote and regulate surety insurance businesses in India and invited comments from stakeholders (for further details please see "IRDAI drafts surety insurance guidelines").
Under section 126 of the Indian Contract Act 1872, a surety insurance contract is a contract in which a surety provider or an insurance company guarantees an obligee or beneficiary, also known as a "creditor", that the principal debtor will meet its contractual obligations or pay monetary compensation to the obligee if the principal fails to deliver on its promise.(1)
"Surety insurance" has been classified under "miscellaneous" in the definition of "insurance business".(2)
While most of the provisions under the 2021 draft guidelines have been retained, there are a few changes in the recently issued 2022 Guidelines:
- Only insurers that are registered to engage in general insurance business may offer surety insurance products. In this context, the 2021 draft guidelines proposed that:
- those applicants for registration whose promoters are already engaged in carrying out surety insurance business in any jurisdiction shall be given preference;(3) and
- an applicant who wishes to register as a specialised or monoline insurer that offers surety insurance may also underwrite trade credit insurance, subject to the IRDAI's guidelines.(4)
However, the 2022 Guidelines neither specify where any preference may be recorded nor allow this new category of insurers to write surety and trade credit insurance.
- While the 2021 draft guidelines proposed that insurers may consider personal guarantees of promoters of principals or contractors as security for issuance of sureties,(5) the 2022 Guidelines omit this suggestion. Further, the 2022 Guidelines expressly add that surety insurance contracts shall not cover financial guarantees in any form.(6)
- The 2021 draft guidelines expressly prohibited issuance of surety insurance contracts for credit enhancement of any financial instruments.(7) This has not been retained under the 2022 Guidelines.
- The 2021 draft guidelines specified the IRDAI's powers to call, inspect or investigate documents, among other things, if it is believed that:
- an insurer carrying on surety insurance business was acting in a manner likely to be prejudicial to the interests of policyholders; and
- continued surety insurance business writing was detrimental to the financial soundness of the insurer.(8)
The 2022 Guidelines do not make any express reference to such powers.
The inclusion of surety contracts under insurance has been deliberated for some time and was sought after by various market players in India. This was particularly prevalent in the construction and projects sector, where, until the implementation of the 2022 Guidelines, parties had to use:
- bank guarantees, which involved collateralisation and commissions; or
- surety insurance that was offered by overseas insurance companies, which required separate regulatory approvals in India.
While press reports indicate that the sector appears to have received the 2022 Guidelines positively, some stakeholders expect that the high incidence of defaults by contractors in India and the relatively slow recovery mechanisms will remain as the main obstacles to the implementation and operation of such surety products.
For further information on this topic please contact Celia Jenkins or Anuj Bahukhandi at Tuli & Co by telephone (+91 11 2464 0906) or email ([email protected] or [email protected]). The Tuli & Co website can be accessed at www.tuli.biz.
Endnotes
(1) Paragraph 4.1 of the 2022 Guidelines.
(2) Paragraph 7.2 of the 2022 Guidelines.
(3) Paragraph 3.3 of the 2021 draft guidelines.
(4) Paragraph 3.4 of the 2021 draft guidelines.
(5) Paragraph 6.2 of the 2021 draft guidelines.
(6) Paragraph 6.4(h) of the 2022 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) Paragraph 6.8(b) of the 2021 draft guidelines.
(8) Paragraph 12.1 of the 2021 draft guidelines.