Depending the risks that an insurer writes, the minimum capital requirements will be decided
Risk-based solvency in the insurance sector is likely to take another three years to be implemented in India.
Sources told Moneycontrol that the industry is looking at their organisational structure as well as their risk management framework to decide on the path to new capital norms. Hence, it will come into force only from April 2021.
“The industry needs more time to move into a risk-based regime. Not only will this mean significant tweaks in the accounting system, the business strategies will also need to be altered,” said the CEO of a mid-size private life insurer.
Currently, insurers’ assets are required to be 1.5 times, or 150 percent, of their liabilities. Once risk-based capital (RBC) framework comes into place, insurance companies will have to hold capital in proportion of the business they write. Riskier the business, higher is the capital requirement.
Hence, the solvency that stands at 1.5 times could rise to 3.5-4 times depending on the risks written by the insurer.
This is to ensure that the companies have adequate reserves in case there is a large claim on the books. Further, companies not wanting to maintain large cash reserves will have to rejig their portfolio towards less-riskier business.
Initially, RBC was to be implemented from April 1, 2019. However, considering the fact that the industry did not have the systems in place to implement it, it was pushed by a year. Now, it is likely to be pushed to April 2021 or FY22.
Insurance Regulatory and Development Authority of India (IRDAI) said that RBC will first be introduced for the insurance sector, followed by intermediaries.
Why do insurers need to adopt it?In the financial sector assessment programme of 2017, the International Monetary Fund and World Bank recommended that IRDAI moved towards an RBC supervisory regime. In Europe, several insurers and reinsurers have adopted the Solvency II regime, where the solvency capital is directly proportional to the risks written by them in their books.
India currently follows Solvency I or a factor-based solvency capital model. This means that a set factor (3 or 4 percent) is multiplied with the mathematical reserves to arrive at the minimum capital that is to be held by insurance companies.
What next?Once Solvency II is introduced, insurers will have to redeploy staff for better risk assessment. At a later stage, IRDAI will assess each insurer based on its ‘risk profile’ and will focus on entities that have a higher risk compared to others.So, if an insurance company writes more of group health business where the claims instances are high, they will be required to maintain a higher level of capital. This is to ensure that the claims-payment abilities of insurers are not impacted by their business decisions.
