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Regulator Irdai on Monday came out with guidelines to ensure orderly development of the surety insurance business and surety bonds market.

The IRDAI (Surety Insurance Contracts) Guidelines, 2022 will come into effect from April 1, 2022, the regulator said in a notification.

Surety insurance pertains to a contract to perform the promise or discharge the liability of a third person in case of default.

As per the guidelines, the surety contracts will include advance payment bond, bid bond, contract bonds, customs and court bond, performance bonds and retention money.

The insurers will be required to have a board-approved underwriting philosophy for surety insurance business.

Surety bonds protect the beneficiary against acts or events which impair the underlying obligations of the principal. Surety bonds guarantee the performance of a variety of obligations, from construction or service contracts, to licensing and commercial undertakings.

"Surety Insurance Contracts may be offered to infrastructure projects of government/private in all modes," the guidelines said, adding that apart from contract bonds, the insurers may underwrite customs or tax bonds and court bonds.

Also, the limit of guarantee should not exceed 30% of the contract value.

As per the guidelines, "Surety insurance contracts shall be issued only to specific projects and not clubbed for multiple projects" and "the insurer shall not issue any surety insurance contracts on behalf of its promoters/their subsidiaries, groups, associates and related parties".

Further, the contracts should not be issued where the underlying assets or commitment are/is outside the country, the Insurance Regulatory and Development Authority of India (Irdai) said.

The guidelines follows recommendations of a working group set up by the regulator to suggest steps to promote surety insurance business in the country.

The working group had suggested that the surety bonds should be accepted as an alternative form of guarantee by the Reserve Bank of India (RBI) and government departments and accordingly reflected in the appropriate contract documents.

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