Irda proposes 145% solvency margin for insurers

The Insurance Regulatory and Development Authority (Irda) has proposed a lower solvency margin for insurers, at 145 per cent as against 150 per cent currently, after including a risk charge. In an exposure draft on a risk-based solvency approach, Irda said the expert committee constituted to suggest the road map to move to Solvency-II norms was in the process of deliberations.

Irda said the requirement would be applicable from 2013-14 and a certificate needed to be furnished on March 31, 2014. It has proposed to impose a risk charge for debt investments of insurers. According to the Irda (Investment) Regulations 2000, a majority of funds need to be invested in government securities and approved investments, and no risk charge is imposed on insurers who invest in riskier instruments.

“The immediate need is felt to define the risk charge on debt instruments and loans and advances of the insurers, to address the spread risk on various categories of debt instruments,” said Irda in the draft.

 

  In line with these concerns, it has proposed a capital charge ranging between 0.9 and 7.5 per cent, based on the instrument rating, with lower-rated ones having a higher risk charge. India now follows a factor-based solvency model for insurers. Solvency-II norms are to insurers what Basel-III norms are for banks. It refers to a common set of rules to be applicable to the European Union’s insurance sector.

These norms are made up of provisions related to capital requirements for the companies, regulatory assessment of a specific firm’s risk, as well as the regulator’s broader supervision of the entire market. Solvency II has not yet come into force in the EU.

The expert committee will take reference from the study of RBC approach of advanced nations like the US, Japan and Singapore, study of Solvency II approach followed by some Indian life insurers and Draft Solvency II requirements.

Further, the committee has been advised to suggest the methodologies of market risk arising from interest rate risk, equity risk, property risk, spread risk and concentration risk.

Irda said all mandated and non-mandated assets of insurers would have risk charge applicable to them. Assets of non-linked business would be considered for risk charge for life insurers, as risks for linked business are borne by policyholder. Loans and advances, said Irda, should be categorised as per ratings of counter parties. For non-performing assets (NPAs), Irda said if insurers followed the provisioning norms required by them, no separate risk charge would be applicable to them.

In January 2007, an Irda circular provided for provision of 100 per cent for loss of assets and provision of 20 per cent up to one year, 30 per cent for one-three years and 100 per cent for more than three years for the portion of assets not covered by realisable value of the security.

Further, the regulator said risk charge would also be provided for the debt of general insurers. It added that suitable changes to the regulations were required to make it applicable to general insurers.

All stakeholders have been given 30 days to submit their comments on the exposure draft to Irda.