Insurers face tighter norms on capital adequacy, risk

Insurance companies will soon have to adhere to more stringent, global standards in capital requirements, with insurance regulator IRDAI set to introduce the Risk Based Capital (RBC) regime.

The Insurance Regulatory and Development Authority of India (IRDAI) has called for Expressions of Interest (EoIs) from consultancies, agencies and institutions for the implementation of the RBC regime.

“IRDAI shall make the transition to RBC to conform to the principles followed in jurisdictions across the globe and consistent with the prevalent core insurance principles of the International Association of Insurers,’’ the regulator said, adding that suitable adjustments will be made to the Indian context. In the RBC regime, the minimum capital requirement will be based on the types of risks to which an insurer is exposed.

An expert panel on the RBC, which submitted its report in August last year, had said: “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.”

The RBC method, on the other hand, is risk-focussed and follows 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.”

In a report on financial services in India released last month, both the International Monetary Fund and the World Bank suggested the adoption of risk-based solvency and supervision.

They had advised the insurance regulator to formulate a strategy and timetable for the introduction of risk-based capital adequacy.

“It should develop a risk-based supervisory circle, using impact and risk assessment to determine supervisory focus. Skill and expertise should be upgraded to this end,” they observed.