Why risk-based capital is still some time away in insurance
The idea behind having RBC was to ensure that companies which have been found to be engaging in risky business practices and offering unsustainable pricing will be required to maintain a higher level of capital.
The insurance industry’s move into a risk-based capital (RBC) regime is expected to take more than three years to be implemented in the country. Under this regime, the capital required will be based on the entity and the type of business that it writes. However, industry players are of the view that a ‘one size fits all’ model cannot be implemented in India.
At present, solvency capital is factor based. This is based on the mathematical reserves of the company and the sum of risk for the particular business. This is also called as Solvency I. In contrast, RBC is a method of measuring the minimum amount of capital appropriate for a reporting entity to support its overall business operations in consideration of its size and risk profile. This means that a company that writes riskier business is required to hold more amount of capital.
Initially, in 2013, the Insurance Regulatory and Development Authority of India (IRDAI) had proposed a lower solvency margin for insurers — at 145 percent against 150 percent 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.
Once RBC comes into force, it will be a new capital regime akin to Basel III norms required for banks.
“The business structures of public sector insurers and private insurers is completely different including the types of businesses written and the underwriting practices. Hence, RBC cannot be similar for both sets of entities,” said a senior official with a large public sector entity.
With respect to RBC, IRDAI had formed a committee which had submitted the first part of its report on Market Consistent Valuation of Liability in 2016. The final report was submitted earlier this year.
The idea behind having RBC was to ensure that companies which have been found to be engaging in risky business practices and offering unsustainable pricing will be required to maintain a higher level of capital to deal with the risks effectively.
The committee has recommended that IRDAI should develop a basis of prescribed actions it would take if solvency cover was to fall below certain limits. The actions may be triggered by a combination of qualitative and quantitative assessment, as per the report.
Insurers are also wary about how risks in a particular businesss will be assessed. “Perception of risks can be very subjective. An insurer writing a certain category of business necessarily need not have higher risks as per RBC if they have adequate experience in that field. The regulator will have to specify how they have arrived at the calculation,” the head of underwriting at a mid-sized general insurance company said.
The report by the committee has prescribed March 2021 as the final deadline for RBC. However, taking into account the concerns of the industry, it may have to be pushed forward at least by a year.
