Insurance regulator Irdai Thursday said it will move to a risk-based supervisory framework in view of significant rise in insurance firms and their intermediaries and a structured approach is needed to asses various risks and ensure financial soundness.
The Insurance Regulatory & Development Authority of India (Irdai) is in the process of adopting 'Risk Based Supervisory Framework' (RBS or RBSF) for holistic supervision of insurance sector in India, it said in a circular to all insurers.
For this, Irdai will develop an overall plan by undertaking a review of the current regulatory and supervisory regime.
A framework will be prepared for holistic supervision by incorporating assessment mechanism into insurance supervision.
To begin with, Irdai said it will primarily focus on compliance based approach for supervision as over the past two decades, the number of insurance entities to be supervised have increased manifold.
To supervise on compliance approach would need the same yardstick to be applied to all regulated entities regardless of its size, business model and nature of significant activities, Irdai said.
"Instead, under RBS, each regulated entity will be assessed based on its 'risk profile' and the overall risk it carries. This will enable the Authority to focus more on entities posing higher risk relative to others. To that extent, the Authority will also be in a position to use its resources efficiently and achieve effective supervision," Irdai said.
Entailing the benefits of moving towards RBS framework, Irdai said it will lead to a structured approach to help assess various risks, both internal to the entity and external environment.
RBS is forward looking and outcome based with due focus on the responsibility of the board and senior management of the entities to ensure financial soundness, it said.
Besides, it will help in identification of various risks relating to market conduct and prudential aspects at an early stage so that timely regulatory intervention is possible depending upon the overall risk profile of the entity.
In the recent Financial Sector Assessment Program report of 2017, the IMF and World Bank recommended Irdai to move towards a risk based supervisory approach.
Irdai will roll out the RBS mechanism in a phased manner starting with insurers and their intermediaries after running a pilot project on select entities to test the efficacy and efficiency of the risk based supervision.
Disclaimer: No Business Standard Journalist was involved in creation of this content
