What are Surety insurance bonds?

In news- In the Budget speech, the Union Finance Minister has said that the use of surety bonds as a substitute for bank guarantee will be made acceptable in government procurements to reduce indirect cost for suppliers and work-contractors.

About Surety insurance bonds-

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.
It is provided by the insurance company on behalf of the contractor to the entity which is awarding the project.
When a principal breaks a bond’s terms, the harmed party can make a claim on the bond to recover losses.
It can effectively replace the system of bank guarantee issued by banks for projects and help reduce risks due to cost overrun, project delays and poor contract performance.
As per IRDAI guidelines for surety bonds, the premium charged for all surety insurance policies underwritten in a financial year, including all installments due in subsequent years for those policies, should not exceed 10 percent 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 percent of the contract value.
Surety Insurance contracts should be issued only to specific projects and not clubbed for multiple projects.