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Irda said that the requirement will be applicable from financial year 2013-14 and a certificate needs to be furnished as on 31 March 2014.
The regulator has proposed to impose a risk charge for debt investments of insurers. According to the Irda (Investment) Regulations 2000, 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 the debt instruments and loans and advances of the insurers to address the spread risk on various categories of debt instruments," said Irda in the exposure draft. In line with these concerns, the regulator has proposed a total capital charge ranging from 0.9% to 7.5% based on the rating of the instrument, with lower rated instruments having a higher risk charge.
India now follows factor-based solvency model for insurers. Solvency II norms are to insurers, what Basel III is for banks. It refers to a common set of rules to be applicable to European Union's (EU) insurance industry. 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 marketplace. Solvency II has not yet come into force in EU.
The committee constituted by Irda will use the study of RBC approach of the advanced nations like USA, Japan and Singapore, study of solvency II approach followed by some of the Indian life insurers and Draft Solvency II requirements. Further, the committee advised to suggest the methodologies of market risk arising from interest rate risk, equity risk, property risk, spread risk and concentration risk.
| Rating Govt and State Govt Securities | Total Capital Charge (in %) |
| Central Govt and State Govt Securities | 0 |
| Securities Guaranteed by Central Govt & State Govt | 0 |
| AAA | 0.9 |
| AA | 1.1 |
| A | 1.4 |
| BBB | 2.5 |
| BB and below | 7.5 |
| Unrated | 7.5 |
Irda also said that 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 is borne by policyholder. Loans and advances, said Irda, should be categorised as per ratings of counter parties. For Non-Performing Assets (NPAs), Irda said that if insurers follow 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% for the loss asset and provision of 20% up to one year, 30% for 1-3 years and 100% for more than 3 years for the portion of the asset 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 are 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.
