IRDAI bans capital gearing treaties by insurers

G Naga Sridhar Hyderabad | Updated on March 30, 2020 Published on March 30, 2020

The Insurance Regulatory and Development Authority of India (IRDAI) has asked insurers not to enter into any capital gearing treaties with immediate effect.

Capital gearing refers to the amount of debt a company has relative to its equity. Companies with high capital gearing will have a large amount of debt relative to their equity.

“It has been observed that some of the insurers have entered into capital gearing treaties in various forms, including Quota Share Reinsurance Treaty. The Authority is of the view that such capital gearing treaties are of the nature of financial arrangements and not primarily a risk-transfer mechanism,” Pravin Kutumbe, Member – F&I, IRDAI, said in a communication to insurers.

Stating that the insurers had adopted these arrangements in order to improve the solvency ratio, the regulator said: “No insurer should enter into any fresh capital gearing treaties.”

Those insurers who are having such treaties on their books should submit a board-approved action plan for phasing out the treaties along with time lines to the Authority on or before June 30, 2020, in such a manner that solvency norms as required are adhered to.

Published on March 30, 2020

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