Focus: GS III: Indian Economy
Why in News?
Union Minister for Road Transport and Highways launched one of India’s first-ever Surety Bond Insurance product from Bajaj Allianz.
What is a Surety Bond?
- A surety bond is a legally binding contract entered into by three parties—the principal, the obligee, and the surety.
- The obligee, usually a government entity, requires the principal, typically a business owner or contractor, to obtain a surety bond as a guarantee against future work performance.
- Surety bonds are mainly aimed at infrastructure development, mainly to reduce indirect cost for suppliers and work-contractors thereby diversifying their options and acting as a substitute for bank guarantee.
- Surety bond is provided by the insurance company on behalf of the contractor to the entity which is awarding the project.
- Surety bonds protect the beneficiary against acts or events that impair the underlying obligations of the principal. They guarantee the performance of a variety of obligations, from construction or service contracts to licensing and commercial undertakings.
IRDAI guidelines for surety bonds:
- The premium charged for all surety insurance policies under written in a financial year, including all instalments due in subsequent years for those policies, should not exceed 10 per cent of the total gross written premium of that year, subject to a maximum of Rs 500 crore.
- The limit of guarantee should not exceed 30 per cent of the contract value. Surety Insurance contracts should be issued only to specific projects and not clubbed for multiple projects.
