Irdai sets up working groups to align risk-based capital regime with Ind AS

The regulator has given two working groups one month to draft RBC regulations and an approach paper, aiming to align capital calculations with Ind AS and reduce compliance costs

The Insurance Regulatory and Development Authority of India (Irdai) on Tuesday constituted two working groups, comprising representatives from life and non-life insurers, to develop a framework for aligning the proposed risk-based capital (RBC) regime with Indian Accounting Standards (Ind AS). The groups have been given one month to prepare an exposure draft of the RBC regulations and an accompanying approach paper.

 

The life insurance working group will be convened by Jamuna Choudhary, while Parmeshwar Shelke will convene the non-life group.

 

The life insurance group includes chief financial officers or appointed actuaries of LIC, SBI Life, HDFC Life, ICICI Prudential Life, Bajaj Life, Tata AIA, Kotak Life, Bandhan Life and Aditya Birla Life, along with Munich Re and the Institute of Actuaries of India.

 

The non-life group comprises similar representatives from New India Assurance, ICICI Lombard, Bajaj General, SBI General, Tata AIG, Niva Bupa, IndusInd General and Kiwi General, along with Swiss Re and the Institute of Actuaries of India.

 

Irdai said the two groups would work in close coordination, with joint meetings wherever issues common to life and non-life insurers arise, to ensure a consistent approach across the industry. All deliberations, data, drafts and documents of the groups will remain confidential.

 

The move is aimed at using Ind AS financial statements as the starting point for calculating capital requirements under the proposed RBC framework, with clearly defined adjustments wherever required for prudential purposes.

 

Currently, insurers follow a factor-based solvency regime. Under the proposed RBC framework, an insurer's capital requirement will be linked to the risks it carries and measured using an economic, or market-consistent, balance sheet.

 

Irdai said running the two frameworks on separate and unconnected bases could increase compliance costs for insurers, create reconciliation complexities and lead to inconsistent outcomes and regulatory arbitrage. Both frameworks share common measurement principles, including estimates of future cash flows, discounting and explicit allowances for risk.

 

The working groups will examine the valuation of assets and liabilities, determination of available and required capital, risk modules, calibration standards, and aggregation and diversification benefits. They will also assess the treatment of key components such as debt securities and expected credit losses (ECL), contractual service margin (CSM), risk adjustment for non-financial risk, insurance acquisition cash flows, reinsurance contracts and property valuation.

 

The exercise will also cover differences between Ind AS and the prudential requirements of the RBC framework, including the construction of risk-free yield curves, discounting methodologies, illiquidity premiums and alignment of the RBC risk margin with the Ind AS risk adjustment.

 

The groups will examine whether certain assumptions and methodological choices should be prescribed uniformly across the industry or whether insurers should be allowed flexibility within specified ranges. Their recommendations will have to be backed by data, quantified impact assessments and sensitivity testing.

 

The regulator has said convergence should not dilute the prudential objective of the RBC framework, which is to protect policyholders at a defined confidence level, or compromise the Ind AS objective of ensuring faithful representation of financial statements.

 

The groups will also prepare templates for insurers to submit RBC-related data to the regulator, covering the RBC balance sheet, reconciliation between Ind AS and RBC figures, available and required capital, sensitivities and underlying assumptions. They will recommend whether the converged framework should be adopted for actuarial valuation of assets and liabilities under Sections 13 and 49 of the Insurance Act, 1938, and assess the need for recalibrating stress factors.