Small entrepreneurs can now appeal to insurance companies for sureties

Small suppliers and contractors can now rely on insurance companies to guarantee their payments without collateral instead of relying on bank guarantees.

However, this newly approved product by the Insurance Development and Regulatory Authority of India (IRDAI) is likely to be more expensive than a bank guarantee as it will be unsecured, experts said.

“In order to reduce indirect costs for suppliers and works contractors, the use of bonds in lieu of bank guarantee will be made acceptable in public procurement. Companies such as gold imports may also find this useful. IRDAI has given the framework for surety bonds by insurance companies,” Finance Minister Nirmala Sitharaman said in her budget speech.

Guidelines issued last month by IRDAI indicate that insurance companies can offer six types of bonds, namely prepayment bond, bid bond, contract bond, customs and court bond, performance and the retention of guarantee.

Insurance companies are still in the process of filing for approval of these products with IRDAI.

“These sureties are a new product and could be particularly beneficial for small entrepreneurs and traders who do not have the luxury of offering collateral for collateral that banks require. This improves access for these small entrepreneurs but will be more expensive than a normal bank guarantee since it is unsecured. This will expand the scope of guarantees for people who were not part of the formal financial system,” said Pratik Shah, Chief Financial Services Consultant, (Insurance ) EY.

Experts said that while the move could be beneficial for insurers, it depends on the acceptance and cost of it that would determine how many small business owners actually use it.

Insurance companies must maintain a solvency margin of not less than 1.25 times the solvency level specified by the IRDA. If the insurer’s solvency margin falls below the specified threshold at any time, the insurer must cease writing new surety insurance business until its solvency margin is restored above the threshold, IRDAI said.

In addition, the premium charged for all bond insurance policies written during a financial year, including all installments due in subsequent years for such policies, shall not exceed 10% of the total gross premium written. of that year, subject to a maximum of Rs. 500 crores.

Insurance companies can work with banks or NBFCs to share information on risks, technical expertise to monitor projects, cash flows, among other aspects, IRDAI said when publishing these guidelines.

Furthermore, the budget also proposed the payment of an annuity and a lump sum to disabled dependents during the life of the parents/guardians, i.e. to parents/guardians who have reached the age of sixty years.

“There might be situations where dependents with different abilities might need the payment of an annuity or a lump sum even while their parents/guardians are still alive,” Sitharaman said.

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