The Insurance Regulatory and Development Authority of India (Irdai) has identified state-owned behemoth Life Insurance Corporation (LIC), the counntry's largest re-insurer General Insurance Corporation (GIC Re), and the largest public sector general insurer New India Assurance as domestic systemically important insurers for the year 2020-21.
These insurers will now be brought under additional regulatory measures to deal with the systemic risks and moral hazard issues. The regulator has asked the three insurance companies to raise their corporate governance levels, identify all relevant risks, and promote a sound risk management culture, given their importance and size, which makes them too big to fail.
According to the regulator, domestic insurers whose market size, market importance, and domestic as well as global interconnectedness makes them to “too big” or “too important” to fail, and whose failure would cause a significant dislocation in the domestic financial system are identified as domestic systemically important insurers (D-SIIs).
“Therefore, the continued functioning of D-SIIs is critical for the uninterrupted availability of insurance services to the national economy”, said the insurance regulator.
“D-SIIs are perceived as insurers that are ‘too big or too important to fail’ (TBTF). This perception and the perceived expectation of government support may amplify risk taking, reduce market discipline, create competitive distortions, and increase the possibility of distress in future”, the regulator further said.
Hence, there is a need to subject D-SIIs to enhanced regulatory supervision.
The regulator has developed a mechanism for identification and supervision of D-SIIs. The parameters include the size of operations in terms of total revenue, including premium underwritten and the value of assets under management; global activities across more than one jurisdiction; lack of substitutability of their products and/or operations; and interconnectedness through counterparty exposure and macro-economic exposure.
“These parameters were assigned weights to cover various aspects of their operations”, said the regulator.
The parameters laid down by the regulator will be used D-SIIs on an annual basis and the regulator will disclose the names of the insurers.
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