IFFCO-Tokio General Insurance on Tuesday announced its foray into the surety bonds business, positioning itself among a limited number of insurers offering this specialised product in India. The move aims to support the country’s infrastructure sector, particularly in easing financial constraints for contractors involved in public projects.

Currently, only a handful of companies such as New India Assurance, ICICI Lombard, SBI General, HDFC ERGO, Tata AIG, and Universal Sompo provide surety bond insurance in the Indian market.

What are surety bonds?

Surety bonds are legally enforceable three-party agreements designed to provide financial assurance for infrastructure projects. They act as a safety net for project owners in the event of a contractor’s failure to meet contractual obligations. Unlike traditional bank guarantees, surety bonds do not tie up a contractor’s capital, making them especially beneficial for small and medium-sized firms.

According to IFFCO-Tokio, these bonds help expand the pool of contractors eligible for government and public sector contracts, while also increasing the project-handling capacity of infrastructure companies.

Infrastructure demand on the rise

The insurer highlighted that the construction industry has already issued bank guarantees worth Rs 1.70 trillion—a number projected to rise to Rs 3 trillion by 2030. Surety bonds are expected to play a growing role in this segment, offering contractors a viable alternative to conventional financial instruments.

By offering these bonds, IFFCO-Tokio aims to address the sector’s demand for risk mitigation tools that also promote trust among all stakeholders involved in infrastructure execution.

Sector faces adoption challenges

Despite regulatory approval in April 2022 for general insurers to offer surety insurance bonds, market adoption remains subdued. Industry experts point to challenges such as limited coordination between banks and insurers, insufficient data sharing, lack of regulatory parity, and weak enforceability of bond agreements.

To address these issues, the insurance regulator set up a task force involving banks, insurers, and reinsurers to streamline operations and encourage wider use of surety bonds. Bajaj Allianz General Insurance was the first to introduce such a product after the regulatory green light.

Backed by international expertise

IFFCO-Tokio General Insurance is a 51:49 joint venture between the Indian Farmers Fertilisers Co-operative (IFFCO) and Japan’s Tokio Marine Group, one of the world’s leading insurance companies. Its entry into the surety bond segment is seen as a strategic step to align with India’s growing infrastructure needs while leveraging global best practices in insurance.