Irda draws 'economic capital' norms

In a move that would result in lower capital requirement for life insurers, the Insurance Regulatory Development Authority (Irda) has asked them to initiate the process of calculating ‘economic capital’ from March 2010.

Economic capital is calculated by determining the amount of capital that insurers need to ensure, depending on the nature of business they write. This is a step towards risk-based capital. The regulator will review it at the end of October.

Insurers said the calculation would be only theoretical at the moment. They would have to also give the actuarial calculation of solvency, based on the current norms.

For a life insurer, the impact would vary depending on the composition of the product. For instance, for products with a guaranteed return, the capital requirement would be higher, whereas for products where there was no guarantee, the capital requirement would be lower. With the industry’s present product composition of 80 per cent unit-linked insurance plans (Ulips), the overall capital requirement towards economic capital will be lower.

“We will have to keep aside either economic capital or statutory capital, whichever is higher. According to the present product composition, most of the insurance companies will have to keep aside capital based on the solvency margin,” said the actuary of a life insurance company.

At present, insurance companies follow a formula-based method of calculating capital. It includes solvency margin, which varies with different products. It is higher for traditional products or products with guarantees while lower for Ulips.