New solvency norms for insurers on cards1 min read . Updated: 18 Sep 2020, 06:11 AM IST
Irdai’s plans come at a time many insurers have solvency ratios just above the minimum limit of 150%
India’s insurance regulator plans to prescribe risk-based solvency requirements and greater equity capital to ensure insurers have sufficient capital adequacy to withstand socioeconomic shocks such as the coronavirus pandemic. The regulator also wants insurers to improve the persistency ratio and introduce new products.
“We are going to roll out some important reforms. Risk-based solvency or capital adequacy system will be introduced. We are working on it and we should be able to do it in about three years," Insurance Regulatory and Development Authority of India (Irdai) chairman S.C. Khuntia said at an industry event.
Irdai’s plans come at a time many insurers have solvency ratios, the ratio of assets against liabilities, just above the minimum requirement of 150%. To maintain a healthy ratio, the insurance company’s promoters must bring in capital, earn profit by selling a large number of policies over many years, or cut expenses and liabilities sharply.
“We also aim to introduce risk-based supervision norms, which are required so that those companies that carry higher risks get more supervision. We want insurers to become more cost-efficient, protect capital conservation ratio, preserve solvency and have a business continuity plan. New accounting standards will also be implemented from 1 January 2023. We may delay it by a year or two but the insurance companies have to start preparing themselves from this year itself," Khuntia said at the 22nd Annual Insurance and Pension Summit organized by the Confederation of Indian Industry (CII).
On 26 August, Mint had first reported about Irdai reviewing key norms to favour those who can withstand deep and prolonged crises. “Irdai may review and tighten the norms relating to minimum paid-up equity capital, solvency, and so on," said the Mint report.
The regulator also wants to ensure that every insurer has enough capital at the start of business.
Initial capital is critical to ride out the losses, expenses and claims in the early years. If promoters are unable to bring in capital later, the solvency ratio may be impaired.
The regulator also wants insurers to improve their persistency ratio, or the percentage of policyholders who renew their policies every year. “The 13-month persistency ratio should not be below 90%. Insurers should work towards this. The interest of insurers should not be to exploit surrenders of policies," said Khuntia.