GIC seeks relaxation in regulatory norms as coronavirus hits operations

With the Covid-19 outbreak severely impacting operations of general insurers, the General Insurance Council (GI Council) has, through a letter to the Insurance Regulatory and Development Authority of India (Irdai), sought relaxations in certain regulatory requirements, particularly those related to solvency ratio. GIC is the representative body of general insurance firms.

The GI Council has said that given the huge mark-to-market (MTM) losses in equity investments during March, Irdai should allow firms not to account for diminution in value in equity investments while finalising accounts for the financial year.

 While insurance firms ignore MTM gains, they are required to recognise MTM losses as expenses.

 “Though the outbreak was relatively delayed in India, the scare, preventive shutdown, and economic fall are unprecedented, with the impact on markets quite telling. Without exception, the non-life insurance sector is severely burdened and we fear having difficulty in meeting regulatory requirements,” stated M N Sarma, general secretary of the GI Council, in the letter.

 The GI Council has also said firms might be allowed to consider MTM position as on February 29, 2020 as the basis of computing solvency.

“Alternatively, Irdai may relax the minimum solvency requirement of 1.5x for the time being,” the letter said. Many firms may see their solvency ratio fall below 1.5 due to the crisis.

 Rating agency ICRA, in its note on the impact of Covid-19 on the insurance sector, had said that non-life insurance firms with a large share of health in their portfolio would see hospitalisation expenses rise substantially if the rate at which the infection is spreading, rises.

 “If claims ratio for the health segment increases by 30-40 percentage points in the event of a net loss ratio of 130-140 per cent (net loss ratio at 97 per cent as of FY19), the total increase in claims could be Rs 6,000-8,000 crore higher compared to March 2019, in the health segment,” said ICRA.

 Besides, non-life insurance firms will also be impacted by MTM losses on their equity investment portfolio, and may need to reflect the same in solvency parameters, in case of negative MTM figures.

 The four state-owned non-life insurers will see a greater impact on their capitalisation, given they use part of the fair value gain on the equity portfolio for solvency requirements, said the rating agency.

 While equity investments of general insurers have taken a hit, their businesses have nosedived, as operations in sectors such as marine cargo, aviation, and travel and tourism have come to a halt.

 According to a senior executive of a general insurer, many firms are likely to default on their premium obligation on April 1, 2020. Further, factories and other establishments are unlikely to renew the non-mandatory insurance cover.

 The GI Council has asked the regulator to relax the period of determining solvency disallowance to 90 days for the outstanding balance of agents and intermediaries, among others, against 30 at present. In the present year, the industry needs to provide for stressed debt investments and the same is not allowed for income tax assessment, till the account is written off.

 “In view of the huge provisions made by the industry and the same disallowed for the purpose of income tax purpose, DTA (Deferred Tax Assets) created for such differences need to be allowed for solvency computation,” GI Council has said.

 On March 23, 2020, Irdai gave relaxation in filing monthly and quarterly returns by 15 days and one month, respectively. Insurers have asked for relaxation by a further 60 days from the respective due dates, and 90 days from annual requirement.

 Further, the GI Council has sought forbearance in compliance requirements of limits on rural and social sector obligations.