To provide an alternative to traditional bank guarantees and help contractors participate more effectively in infrastructure, Tata AIG General Insurance introduced surety insurance bonds to support the Government's infrastructure development initiatives. The Government has allocated 3.3 per cent of the GDP for FY2024 for infrastructure, creating significant potential for insurance companies offering surety bonds, which will enable contractors to unlock capital, enhance their bidding capacity and overcome liquidity and capital constraints. Deepak Kumar, Senior Executive Vice President and Head, Reinsurance, Credit and Aviation Insurance, TATA AIG General Insurance, in an email interaction informs R SRINIVASAN about what makes security bonds more ideal compared to traditional bank guarantees and shares his views of the bond market in 2024 and going ahead. Excerpts: Security bonds are designed to provide an alternative to traditional bank guarantees, helping contractors participate more effectively in the infrastructure sector. What makes them preferable? The fact that surety bonds will be offered without the requirement of a collateral or margin money makes them an economical option for contractors vis-à-vis bank guarantees. Although bank guarantees look cheap to the naked eye, there is a hidden cost that comes with the requirement of collateral or margin money. Moreover, for contractors who do not have strong financial strength, banks sometimes insist on margin money of up to 70 per cent, which impairs their working capital. Thus, surety insurance would be a more cost-effective solution for contractors any day. As the Government has allocated 3.3 per cent of the GDP for FY2024 for infrastructure, creating significant potential for insurance companies offering surety bonds, how does your firm stay ahead? The surety insurance market today is heavily skewed towards the relatively less risky and lower quantum bid bonds because insurance firms do not have the requisite support in the form of capacity. Reinsurance support has been slow to come under our existing legal ecosystem for the product. Large quantum transactions refer to high value bonds, i.e. bond requirements of significantly high amounts. Typically the bid bond tends to be only 1-2 percent of the contract amount – for example if a contract value is say Rs 10 billion, the bid bond requirement would be only Rs 0.1 - 0.2 billion. On the other hand, for performance, advance and retention bonds the requirement could be 5-15 percent of the contract value (so Rs 0.5 – 1.5 billion for a Rs 10 billion project). Hence, more reinsurance support would be required to support performance, advance and retention bonds. Tata AIG, on the other hand, has the necessary reinsurance tie-ups and is hence in a position to support all the four types of contract bonds (bid, performance, advance and retention) allowed by IRDAI. This is illustrated from the fact that we were able to issue a performance surety insurance bond exceeding `1 billion just within two months after rolling out our offerings, which is a first for the industry. Other points are: Readiness to issue unconditional bonds and customise bond wordings as per beneficiary requirement Strategies to strengthen partnerships and relationships with government beneficiaries, contractors and respective intermediaries Designing prudent underwriting and risk management framework. From TATA AIG’s product suite, including contract bonds such as bid, performance, advance payment and retention money bonds, which is most suited to India's goal of becoming a $ 5 trillion economy? All bonds are equally important as each has its own purpose. A bid bond is required during the project bidding stage whereas other bonds are required during project execution. As the quantum for performance, advance and retention bonds are on the higher side, true success of the product will be gauged from the ability of insurance companies to support these three bonds. This would need to be complemented by an increase in the number of beneficiaries accepting surety insurance bonds. The Government's plan to launch the surety insurance bonds market as an alternative to bank guarantees in infrastructure projects failed to take off due to technical and financial impediments. To what extent has the market improved now? Also, insurers are not granted the same rights as other financial creditors during a bankruptcy process. In view of the above, what would you suggest ought to be done? The market has now settled down after the initial teething issues associated with the launch of any new product. As on 31 March 2024, over 500 bonds have been issued. The number of insurers offering the product is also increasing gradually. Also, we are seeing many beneficiaries coming forward and accepting surety insurance bonds in their tenders, which is a huge positive. So, the market has definitely improved in the past 12 months or so. The rights of insurance companies as financial creditors are a matter of deliberation. Any matter involving legal remedies is difficult to comment upon unless there is adequate precedence – this being a new product, there is no precedence of any previous case laws. Insurers are currently securing their losses and recovery through a counterindemnity agreement (deed of indemnity) with the insured. Nevertheless, to reduce ambiguity, the Government had proposed the inclusion of insurance companies as financial creditors under IBC. We are still awaiting a confirmation on the same from the Government. Once this is done, we believe the market will explode with more opportunities and an influx of reinsurance capacity. What is your view of the bond market in 2024 and going ahead? The surety insurance market is at a very nascent stage in India. The potential is huge – we have already seen 500+ bonds issued – and opportunities will build up. We are seeing more beneficiaries coming forward and keen to explore surety insurance, a trend that we expect to build up through 2024.Though we await the Budget to be announced next month, we expect government spending on infrastructure to be significantly high. With underwriting experience also growing within the Indian insurance industry, we can see more surety bonds being issued for sectors apart from roads, like railways, renewables and the solar and hydropower industry, and expect insurers to venture into other lines of commercial surety too. For the product to really take off in the long run, we would need confirmation on the status of insurance companies as financial creditors, which will really accelerate the market and enable a strong influx of reinsurance support.