Panel set up on risk-based capital norms in insurance

Insurers say India isn't ready from an accounting perspective for solvency these norms, which are to insurers, what Basel-III is to banks

Norms on risk-based capital in insurance are expected to take more time to be implemented. The regulator has set up a committee on an approach to this and on and liability valuation.

In 2013, the Insurance Regulatory and Development Authority of India (Irdai) had proposed a lower solvency margin for insurers, at 145 per cent against 150 per cent currently, including a risk charge. Earlier, in a proposal on a risk-based solvency approach, the regulator had constituted a committee to suggest a roadmap to move to Solvency-II norms.

Solvency-II is a European Union (EU) legislative programme, to be implemented in all 28 member-states. These are to insurers what Basel-III norms are to banks and introduces a harmonised and EU-wide insurance regulatory regime. The objective is uniform policyholder protection across countries. Insurance executives say India is not ready from an accounting perspective for these new norms. At present, India uses factor-based processes to arrive at the solvency margin.

These new norms are made up of provisions related to the capital requirements of companies, regulatory assessment of a specific firm’s risk and the regulator’s broader supervision of the entire market. Solvency-II has not yet come into force in the EU. Discussion is on regarding whether these should be implemented in many of the EU markets and the transition phase to be followed. Only after clarity emerges would the issue begin of enforcement in India.

The committee set up by Irdai will look into the pros and cons of the current solvency regime and a risk-based capital one. It will also review the recommendations on risk-based of a committee chaired by P A Balasubramanyam, and recommend a suitable approach. It will recommend a broad time-frame for completion of the exercise.

Some early steps have already been taken by the regulator. For instance, in some business segments, it has already been proposed that risk-based pricingl be followed. Irdai has asked insurers to maintain higher solvency for segments like health and motor where incurred claims are high. The regulator has since come up with norms for maintaining of solvency ratio by insurance companies based on the line of business. For segments like health, motor and liability, the insurer would be required to maintain a higher solvency ratio.

The Available Solvency Margin (ASM) is calculated as the excess of value of assets over liabilities. Solvency Ratio means the ratio of the amount of ASM to the amount of Required Solvency Margin. The higher the ratio, the more financially sound a company is considered. The required ratio is 150 per cent, a minimum to be maintained.