Insurers bullish about new capital norms

Convergence of financial products and a move towards risk-based capital in the banking sector are motivating the Insurance Regulatory and Development Authority (Irda) to move beyond the traditional required solvency margin (RSM).

Indian life insurance players expect new norms on capital requirement, which would be laid down for the Indian banking industry, shortly, said life insurance CEOs.

"Moving forward, insurers could inject more capital, which is linked to their corporate strategy," said C S Rao, chairman, Irda.

Today, Indian life insurance companies have to maintain the Irda-stipulated 150 per cent solvency margin just as Indian banks maintain a 9 per cent capital adequacy ratio, irrespective of risks underwritten.

Today, growth in the sale of insurance products is chiefly in the sale of unit-linked insurance plans (ULIPs). These products carry almost negligible risks on the books of insurance players.

Hence, "technically the requirement of capital should only be on the mortality risk as the investment risk is passed on to the policyholder," said R Krishnamurthy, senior consultant, Watson Wyatt.

Insurance companies would be able to introduce more innovative risk products for the masses, with the introduction of risk-based weightage on capital employed, he added.

If India moves towards risk-based capital, players like Birla Sun Life Insurance Company would need a lower capital requirement than the current 150 per cent.

This is because it operates on an ULIP-based platform whereby the investment risk is passed on to policyholders, pointed out analysts. Even then, Birla Sun Life rings the bell for infusion of additional capital as soon as the RSM hits 190 per cent.

"We want to ensure we have a buffer. The moment the RSM touches 190 per cent, it is time to raise capital from shareholders," said K S Gopalakrishnan, appointed actuary, Birla Sun Life.

Following the infusion of Rs 20 crore capital in April, Birla Sun Life has one of the highest RSMs in the country at 211 per cent "" on a capital base of Rs 370 crore.

In Singapore, since the introduction of risk-based capital, insurance companies writing solely investment-linked business have seen a major reduction in capital requirement from S$25 million to S$5 million.