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The Insurance Regulatory and Development Authority of India (IRDAI) may soon introduce risk-based capital (RBC) method for fixing the solvency ratios of insurers.
An expert panel appointed by the authority has recommended moving to the RBC method as the present system “is not sufficiently transparent or risk-focussed to adequately reflect the true financial conditions of the insurance companies.”
Currently, the solvency capital is fixed based on the reserves and the sum at risk for the life insurer.
“The drawback of the current solvency method is that the level of confidence provided by the capital held by the companies is not known. So the capital held may be too high or too low given the risk profile of the companies,” said the panel in its report.
The RBC method, on the other hand, is risk-focussed and follows the standards adopted in developed countries.
With greater transparency on risks, it will facilitate comparisons across insurance companies, providing information such as the financial strength of the insurers. This will help in early and effective intervention by the regulator, if necessary.
RoadmapThe implementation, however, may not be easy. The panel has recommended a “Twin Peak” approach whereby the current reporting structure would continue with the new system operating in parallel. The insurance companies had sought this arrangement for at least two years.
The panel puts the timeframe for full implementation of RBC at “a minimum of three years”.
The immediate step for the regulator will be to set up a project steering committee to hire consultants.
The reforms in solvency capital norms assume more significance in the wake of the recent crisis at Sahara India Life. After noticing alarming irregularities, the IRDAI took over the insurer’s administration and liabilities, which were later acquired taken over by ICICI Prudential Life Insurance.
On IRDAI’s views on the panel’s recommendations, a senior official said: “The authority will take a decision after reviewing the opinion of all stakeholders.”
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