The Hindu Business Line : Insurers to state solvency every six months

Taking stock
Solvency reporting is now done on an annual basis.
With Core Insurance Solution in place, insurers are in a position to meet new reporting standards.
Change in line with IAIS guidelines for transition to a Solvency Two regime.
Solvency margin, financial leverage may come under pressure as insurance coverage increases.

C. Shivkumar

Bangalore, Sept. 3 Non-life insurers in the country are expected to begin reporting solvency on a half yearly basis beginning this month-end.

A top official of a public sector insurance company said that the move was taken after insurers migrated to a free pricing regime effective from the beginning of this year. “In a free pricing regime, solvency also should be reported more frequently,” the official said.

This was also in line with the International Association of Insurance Supervisors (IAIS) guidelines for transition to a Solvency Two regime.

Initially, the solvency would be reported on a half yearly basis. From next year, the solvency reporting frequency would be stepped up.

Sources said that with the Core Insurance Solution in place, insurers were in a position to meet the solvency reporting standards of IAIS. Presently, non-life insurers’ solvency reporting is still done on an annual basis. This implied that the value of the assets and liabilities are taken as on March, when the financial year ends.

More dynamic

The Insurance Regulatory and Development Authority’s (IRDA) prescribed solvency margin is 150 per cent. Solvency margin is the excess of the value of assets and capital that non-life insurers have to maintain over the insured liabilities.

However, with the shift to the free pricing regime, the sources said solvency reporting was also required to be made more dynamic. This was because the changes in insurers’ liabilities were likely to be far more higher than at the end of the financial year.

Technical reserves

Insurers have so far not felt the pressure of these liabilities during the year in view of the large technical reserves maintained by them as prescribed in the Insurance Act of 1938.

Insurers currently maintain technical reserves against unexpired risks and IBNR (incurred but not reported) risks. Technical reserves are kept outside the purview of solvency margins and capital adequacy. But such reserves have ensured that the domestic insurance companies are under leveraged as indicated by the technical reserves/policy holder surplus ratio that is about 100 per cent.

But the sources said that the solvency margin and the financial leverage could come under pressure as insurance coverage in the country increases. General insurance coverage in India is barely one per cent of the gross domestic product. The aim now is to raise this close to the Asian average of 3 per cent.

Besides, some of the assets, especially Government securities, have depreciated in value.

Riding stock boom

So far, public sector insurers have sustained their solvency through ceding to reinsurance and shrewd asset management. This implied sale of equity taking advantage of the gyrations in the stock markets.

The profits realised were credited to the general reserves for boosting capital. Insurers, however, admitted that equity sales could not be a permanent solution for complying with the regulator’s guidelines. This was especially in a situation where global reinsurance terms were hardening as a result of the US sub-prime lossess.

Consequently, insurers said that there was little alternative to increasing their paid-up equity base, they added.