Risk-based solvency norms for insurance firms on the cards

The Indian insurance industry may be thrown open for better risk management practices that are adopted by their banking counterparts abroad.

The Insurance Regulatory Development Authority (Irda) proposes to introduce risk-based solvency norms to ensure that the insurance industry is not caught offguard.

According to C S Rao, chairman of Irda, the International Association of Insurance Supervisors is working out the norms for risk-based capital provision by insurance companies globally. Once the norms are in place, a framework can be worked out for the Indian insurance industry. However, it will take some time, he said.

To start with, Irda is considering a proposal to implement risk-based capital norms for health insurance schemes, he added. Explaining the risk-based capital, an actuary with a leading insurance company said the health insurance firms might be asked to maintain risk-based solvency margins.

At present, life insurance companies maintain capital linked to the value of the life insurance liabilities and other liabilities of policy holders' funds and shareholder's funds.

Meanwhile, banks, on the other hand, are readying themselves to adopt the Basel norms for risk based capital provisioning and asset classification and now are graduating to Basel II norms.

Under risk based capital provisioning, the capital will be made proportional to the perceived risk of the scheme. To that extent, those schemes which are less risky may require less capital to be provided for whereas the capital requirement will be high for high risk schemes.

Soon after licensing new insurance companies, Irda had issued a directive asking all insurers to maintain 150 per cent of the statutory requirement.

Available solvency margin means the excess of value of assets over the value of life insurance liabilities and other liabilities of policyholders' fund and shareholders' funds.

Solvency ratio refers to the ratio of the amount of available solvency margin to the amount of required solvency margin.