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Insurance regulator IRDA has issued uniform asset-liability management norms for insurers to manage their solvency, and asked insurance companies to undertake stress tests to ascertain their ability to meet financial obligations in the event of a crisis.
On examination of the extant norms being followed by insurance companies, IRDA found they were “incomplete and inconsistent. As the mandate by the authority was very broad, each insurer had adopted their own measures in reporting such details”.
“The Asset-Liability Management (ALM) is relevant to and critical for the sound management of the finances of the insurers that invest to meet their future cash flow needs and capital requirements,” IRDA said in a circular.
The guidelines, which would come into effect from April 1, make it mandatory for insurance companies to prepare an ALM policy and have it approved by the Insurance Regulatory and Development Authority (IRDA) by March-end.
“Stress testing being critical in the management of risks and the financial soundness of the insurers… the authority has mandated all insurers to conduct scenario and sensitivity testing,” IRDA said.
Effective procedures
IRDA has asked the insurance companies to determine their ability to meet financial liabilities after taking into account factors like a 30 per cent fall in equity values and a one percentage point decline in yields on fixed investments, among others.
IRDA has issued these guidelines to bring about uniformity in the ALM norms being followed by both life and non-life insurance companies.
IRDA has said that insurers would have to put in place effective procedures for monitoring and managing their asset-liability positions to ensure that their investment activities and asset positions are appropriate to their liability, risk profiles and solvency positions and it should be used to measure the interest rate risk faced by insurers.
The ALM policy should enable the insurers to understand the risks they are exposed to and develop ALM policies to manage them effectively.
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