Solvency-II in insurance may take longer to be implemented

Not all players in the Indian insurance sector are ready for a solvency mechanism based solely on risk

Solvency-II norms, which call for risk-based capital in insurance, would take more time to be implemented, than was estimated earlier. This is because some players in the Indian insurance sector are not yet ready for a solvency mechanism based solely on risk.

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 an expert committee to suggest the roadmap to move to Solvency-II norms.

ALL ABOUT SOLVENCY-II

• Solvency-II is a European Union (EU) legislative programme to be implemented in all 28 EU member states
• Solvency-II norms are to insurers what Basel-III norms are to banks
• It introduces a new, harmonised EU-wide insurance regulatory regime
• Its key objective is to have a uniform policyholder protection across countries through a robust system

Solvency-II is a European Union legislative programme to be implemented in all 28 member states. It introduces a new, harmonised insurance regulatory regime. Its key objective is to have a uniform policyholder protection across countries through a robust system. This will enable a regime that will have sharper pricing and better allocation of capital.

India does not have the requisite statistical database to adopt Solvency-II norms, said a senior life insurance executive.

“We use factor-based processes to arrive at the solvency margin. Moving into a completely different system will take time.” The norms were supposed to be applicable from 2013-14 and a certificate needed to be furnished on March 31, 2014. A risk charge for debt investments of insurers was also proposed.

 

Solvency-II norms are to insurers what Basel-III norms are to banks. These 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.

According to experts, Solvency-II has not yet come into force in the EU and, hence, it would be wrong to assume that India will adopt it immediately. Discussions are underway on whether Solvency-II should be implemented in many of the EU markets and the transition phase to be followed. Only after clarity emerges on it, will it be enforced in India.

 

Irdai’s expert committee will take reference from the study of risk-based capital approach of advanced nations such as the US, Japan and Singapore and that of Solvency-II approach followed by some Indian life insurers.

The regulator said risk charge would also be provided for the debt of general insurers. It added that suitable changes to the regulations were required to make it applicable to general insurers.

In some areas, it has already been proposed that risk-based pricing will be followed. For instance, in group health insurance where heavy discounts are being offered, it is proposed that insurers will have to maintain higher solvency or capital.