India Advances Principles-Based Framework for Surety Insurance Regulation 2024

Since the formal introduction of surety insurance contracts in India in April 2022, the regulatory environment has undergone significant evolution towards a more liberalised, principles-based framework as of 2024. Initially governed by detailed IRDAI (Surety Insurance Contracts) Guidelines in 2022, these regulations were designed with prescriptive constraints to ensure prudent market development and address the unique risks associated with surety products. The Insurance Regulatory and Development Authority of India (IRDAI) initiated this regulatory framework after a 2020 Working Group recommendation responding to liquidity challenges in the banking sector during the pandemic. The 2022 Guidelines placed restrictions on surety contract design but allowed market growth under close supervision. In June 2024, the IRDAI implemented the Master Circular on General Insurance Business and Product Regulations, which marked a shift to a principles-based regime. This new regulatory approach streamlined requirements, reduced detailed provisions, and empowered insurers with greater flexibility in underwriting and product innovation, reflecting increased industry maturity. Despite liberalisation, critical restrictions remain: financial guarantees continue to be prohibited to ensure surety insurance focuses on performance obligations. Surety contracts must reference Indian assets and payments must be in Indian Rupees, maintaining jurisdictional and legal enforceability. The regulation also bans complex alternate risk transfer mechanisms to promote transparency. Structurally, surety contracts in India are treated both as contracts of guarantee under the Indian Contract Act, 1872, and as insurance policies, applying principles like utmost good faith, insurable interest, and indemnity. This dual nature affects contractual rights, such as subrogation, and regulatory treatment including stamp duty assessments. The framework acknowledges limitations under insolvency laws, where surety insurers lack the protections afforded to financial creditors, highlighting ongoing legal nuances in claims against insolvent policyholders. Overall, the IRDAI’s regulatory evolution balances market growth with safeguards that maintain contract integrity and jurisdictional control. The more flexible principles-based framework positions the surety insurance sector in India for expanded growth in a maturing insurance market.