Page 23 - Insurance Times April 2021

X Further in Australia, the dependence on aged coal- banking system is carrying, which has originated
fired power stations places Australia's energy from the infrastructure. Recently, many project
security at risk. contractors had placed unrealistic low bids to win
projects many of which had run into financial
X Large investments are expected in upgrading
problems; those projects came to a standstill
generation and transmission facilities, which would
causing losses to banks with risk exposures.
to be a strong driver for the growth of the surety
market here. X In India, SREI CBL Guarantees is joint venture
X Recently there is interest in issuing bonds to cover recently established between SREI Group of India
the mining industry. and CBL Corporation of New Zealand who will
provide such type of surety bonds. (Janardan Gadi,
X Example: In 2018, big insurance companies 2019).
provided Australian governments with financial
guarantees related to the rehabilitation of X CBL's strong record of accomplishment and
coalmines. Peabody Energy ran such rehab experience in bonds, sureties and guarantees
activities. coupled with Srei Group's expertise and local
market expertise would create tremendous value
India for infrastructure related projects in India backed
X The National Highways Authority of India (NHAI) by surety bond issuance.
has proposed insurance cover for road projects, in
a step that could help bring in credible project ROLE of Reinsurers in Surety Bond:
developers and mitigate construction period risks.
Reinsurance support for surety bond remains very cheap by
NHAI has proposed to the Insurance Regulatory and
Development Authority of India (IRDAI) to come up historical standards in the current time period. The Surety
with an instrument to provide surety coverage; the Bond industry performance has made it an attractive option
background is that banks are facing difficulties in for reinsurers. This factor has helped surety providers to
furnishing bank guarantees in India. The ministry is purchase increased levels of reinsurance covers at improved
working on this new instrument. The ministry in and more favorable terms than previous years. With surety
India wants the performance obligation of losses being large especially due to insolvencies of
concessionaires in road projects covered by construction companies, reinsurance provides the vital
insurance. (NHAI moves IRDA proposing insurance support to stabilize the surety provider's financials and
encourages underwriters to take more risks.
of road projects, 2020).
X While we expect IRDAI to open this line of business, Observing the reinsurance support for surety bond business,
surety bonds would be a huge business avenue for
the lead capability has been generally from U.S. domiciled
Indian insurers; this will ally the fear of private providers of reinsurance. Besides large Europe based
investors who are wary of the construction risks.
reinsurers, followed by Bermudian domiciled reinsurance
X Drivers for Surety Bonds Growth in India: The companies are active in providing reinsurance. Further, the
recent economic survey released in January 2018 Lloyds of London has shown growing interest in U.S. surety
indicates that India will require US $4.5 trillion until reinsurance over recent years and enabled this business.
2040 to finance the infrastructure sector. This Reinsurers from Asian markets are limited, waiting to
investment will be needed to develop fresh understand the business before entering this huge market.
infrastructure as well as renovate existing ones
across roads, railways, shipping, power, oil and gas, The kinds of treaties provided for this class of business are
housing, renewable energy, urban infrastructure primarily:
and urban transport. The capacity of any
Pro Rata - Issued commonly on per bond bases.
contractor to produce a surety bond is an
Excess of Loss (XOL) - Issued for losses computed per
attestation of his capability to execute the project
Principal.
and enhances his project opportunities. (Vikash
Khandelwal, 2018). Combined Program - Pro Rata & XOL aspects.
X Surety Bonds in India would be a panacea to a Facultative: Not common though there is concept of Co-
sizable chunk of non-performing assets that the surety / Share Accounts.

The Insurance Times, April 2021 23