Insolvency requirement, cap on GWP challenges for surety contracts

Chennai: The government had proposed the introduction of Surety Insurance Contracts to replace bank guarantees for businesses and projects. However, higher insolvency margin, cap on the share of Gross Written Premium are some of the challenges insurers face in providing SICs.

“In order to reduce indirect cost for suppliers and work contractors, the use of surety bonds as a substitute for bank guarantee will be made acceptable in government procurements,” the Finance Minister had said in her FY23 Budget speech.

While insurers are required to maintain a solvency margin of 1.5 in course of their regular business, those who write SICs need to maintain a solvency margin of 1.875. There are twenty-five insurers registered with the insurance regulator to transact non-life insurance business in India. Going by the data as on 31st March, 2022, twelve out of these twenty-five, will be ineligible to write SICs as their solvency margins are less than 1.875. This includes all four public sector insurers who do not meet the solvency requirements. Even the national reinsurer, GIC Re, will not be able to reinsure the SIC business, finds a study by Insurance Resource Group.

The study wants the regulator to explore the possibility of treating the SIC business as a quasi-independent Strategic Business Unit (SBU) within an insurance company with separate allocation of assets & liabilities and a stand-alone solvency requirement.

Further, the Gross Written Premium from SICs cannot exceed 10 per cent of an insurer’s total GWP in a year, subject to a maximum of Rs 500 crore. The group advocates removal of the cap.

“Since most insurers cede out a major part of the values at risk to reinsurers, using GWP as a measure of risk to cap the business sourced from SICs needs to be re-looked at.

Net Written Premium can be a better measure of the risk that insurers are exposed to whilst writing SICs,” said Sanjay Pande, senior associate of Insurance Resource Group.