GI Council urges IRDAI for easier MTM rules to take on Covid-19 disruption

Wants regulator to allow companies to consider MTM losses as on Feb 29, instead of March 31 for the purpose of drawing up the P&L accounts

With Covid-19 severely impacting the operations of non-life insurers, the General Insurance Council (GIC), the representative body of firms in this space, has urged the Insurance Regulatory and Development Authority of India (IRDAI) to relax certain regulatory requirements, particularly those related to solvency ratio.  

In a letter to the insurance regulator, GIC has said that given the huge mark-to-market loss in equity investments in the current month, IRDAI should allow companies not to account for diminution in value in equity investments while finalising the accounts for the year ending March 31, 2020.

While insurance companies ignore mark to-market-gains, they are required to recognise mark-to-market losses as an expense in their profit and loss accounts.

“Though the virus made a relatively delayed entry into India, the scare, the preventive shutdowns and economic fall are unprecedented and the adverse impact on financial markets is quite telling. Without exception, the non-life insurance sector is severely burdened and we are afraid we will have difficulty in meeting certain regulatory requirement,” M N Sarma, general secretary, GIC, wrote in the letter.

GIC has also said that companies might be allowed to consider mark-to market position as on February 29, 2020 as the basis of computing solvency.

“Alternatively, the IRDAI may relax the minimum solvency requirement of 1.5 times for the time being on the same lines as the regulator had relaxed at the time of dismantling motor third party pool,” the letter said.

Many companies may see their solvency ratio fall below 1.5 due to the ongoing crisis.

Rating agency Icra in its note on the impact of Covid-19 on the insurance sector had said non-life insurers with a large share of health covers in their portfolio will see hospitalisation claims rise substantially if the rate at which the infection is spreading accelerates. “If the claims ratio for the health segment increases by about 30-40 percentage points in the event to 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 claims compared to March 2019 in the health segment”, Icra said.

Apart from that, non-life insurance companies will also be impacted by mark-to-market (MTM) losses on its equity investment portfolio, and may need to reflect that in the solvency parameters in case the MTM is negative. The four state-owned non-life insurers will see a greater impact on their capitalisation, as they are using a 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 official one one such firm, many companies are likely to default on their premium obligation on April 1, 2020. Also, factories and other establishments are unlikely to renew non-mandatory insurance cover.

The GIC has asked the regulator to relax the period of determining solvency disallowance to 90 days for outstanding balance of agents and intermediaries, among others, against the present 30 days.

Also, in the present year, the industry needs to provide for stressed debt investments as 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,” GIC has said.

On March 23, 2020, IRDAI extended the deadline in filing monthly and quarterly returns by 15 days and one month, respectively. The insurers have asked for a relaxation of another 60 days from the respective due dates and 90 days from annual requirement.

Further, GIC has also sought forbearance in the compliance requirement of limits on rural and social sector obligations.

Insurers also have asked the regulator for easier dealing room guidelines and allow insurance companies to continue to work from home till normalcy.