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Solvency-II norms, which call for risk-based capital in insurance, are expected to take longer to be implemented in India. This is because not all players in the Indian insurance sector are ready for a solvency mechanism based solely on risk.
In 2013, Insurance Regulatory and Development Authority of India (Irdai) had proposed a lower solvency margin for insurers -- at 145 per cent against 150 per cent currently -- after including a risk charge. Earlier, in an exposure draft on a risk-based solvency approach, the regulator had constituted an expert committee to suggest the roadmap to move to Solvency-II norms was in the process of deliberations.
Solvency-II is a European Union (EU) legislative programme to be implemented in all 28 EU member states. It introduces a new, harmonised EU-wide insurance regulatory regime. Its key objective is to have a uniform policyholder protection across countries through a robust system. This will enable a regime that will have sharper pricing and better allocation of capital, since solvency will be based on the risks.
A senior life insurance executive explained that India does not have the requisite statistical database to adopt Solvency-II norms. "We use factor-based processes for arriving at the solvency margin and hence moving into a completely different system will take time," he said.
What Solvency-II means
A European Union (EU) legislative programme to be implemented in all 28 EU member states
Norms are to insurers what Basel-III norms are for banks
Introduces a new, harmonised EU-wide insurance regulatory regime
Key objective: is to have uniform, robust policyholder protection system across countries
It was earlier said that 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. But it will not be implemented now and could take atleast 2-3 years more.
"The regime will take minimum of three years more to be implemented in the country. Only some large private and state-owned insurers are ready for the transition, whereas several newer players are not," said the chief financial officer of a private general insurer.
Solvency-II norms are to insurers what Basel-III norms are for banks. These norms are made up of provisions related to the capital requirements of companies, regulatory assessment of a specific firm’s risk, and the regulator’s broader supervision of the entire market.
According to industry experts, Solvency-II has not yet come into force in the EU and hence, it would be wrong to assume that India will adopt it immediately. Discussions are underway on whether Solvency-II should be implemented in several of the EU markets and the transition phase to be followed. Only after clarity emerges on it, will it be enforced in India.
Irdai’s expert committee will take reference from the study of risk-based capital approach of advanced nations such as the US, Japan and Singapore and study of Solvency-II approach followed by some Indian life insurers.
An Irdai circular of January 2007 provides 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 the realisable value of the security.
Further, the regulator said risk charge would also be provided for the debt of general insurers. It added suitable changes to the regulations were required to make it applicable to general insurers.
In some areas, it has already been proposed that risk-based pricing will be followed. For instance, in group health where heavy discounts are being offered, it is proposed that insurers will have to maintain higher solvency or capital.
Industry News