Six months since launch, surety bonds see no takers so far
It has been nearly six months since the launch of the first secured bond product, and there is still no take on the product, due to several operational challenges, delays in policy changes and the absence of standardized processes.
Described as an alternative to bank guarantees (BGs), surety bonds offer the benefit of performance or coverage linked to execution and assignment of collateral for a premium, thus freeing up clients’ assets. But, in their current form, surety bonds offer minimal benefits over regular BGs.
“There is a problem with some approvals. Demand is high, insurers are getting calls and want to sell the product, but there are challenges. The product is available, it’s launched, people can buy it. That whole system is there,” said an industry official, adding that the process is well-defined The convenience of using BGs compared to the complexity and conditions in surety bonds also act as a deterrent.
obstacles for customers
Insurers demand huge amounts of data, including contractors’ experience, similar previous experience, credit rating, financial stability and other information, especially in cases involving litigation, which increases hurdles for clients.
Despite the demand from customers, there may already be many BGs going on and finding it hard to get close to banks, increased buying still depends heavily on how the contingent bonds are structured and whether they will be issued like BGs, market participants said.
Companies are looking for other avenues, and secured bonds are the next thing they want. But the product must be profitable for customers to enter into more and better projects, and where it can be covered at different levels unlike BG,” said an insurance broker’s official.
Surety bonds are triple contracts, wherein insurance companies provide the guarantee in the event of default on a project. Warranty bond products may be based on bid issuance, advance payment, contract, performance, money retained, customs and court bonds.
However, the products available on the market to date – largely performance, tender and maintenance – left a lot to be desired, according to market players. These products are conditional, seek collateral, require heavy documentation, and require more complex claims processing versus invoking a bank guarantee.
increase in demand
The bulk of the demand comes from the infrastructure and construction sectors, especially in projects where banks do not want to increase exposure or stifle their capabilities by awarding BGs.
“There is a clear market demand for unconditional bonds to replace BGs,” said Subramaniam Brahmagosola, chief technical officer at SBI General Insurance, adding that since the product is new for insurers and there is a steep learning curve and firmer and more advanced offerings it will take time.
In May, SBI General became the third insurance company to launch such a product after New India Assurance and Bajaj Allianz General which launched the first product in December 2022.
optimistic look
IRDAI’s recent easing and the government allowing surety bonds to be issued retroactively, in lieu of some infrastructure BGs, is expected to open more avenues for insurers, given the size of the market that can be addressed, expected increase in demand from contractual projects and freight capacity. Now higher premiums for increased exposure.
Market players hope that in addition to policy changes, as more policies are insured, insurers gain experience and processes are put in place, products will evolve and more insurers enter the space, fueling demand.