IRDA releases exposure draft on risk based solvency approach

India Infoline News Service | Mumbai |

IRDA said the expert committee constituted to suggest the road map to move to Solvency-II norms was in the process of deliberations

The Insurance Regulatory and Development Authority (IRDA) has released an exposure draft on risk based solvency approach. The regulator has proposed a lower solvency margin for insurers, at 145% against 150% currently, after including a risk charge.
IRDA said the expert committee constituted to suggest the road map to move to Solvency-II norms was in the process of deliberations. Insurers are required to maintain sufficient assets to discharge the liabilities that arise from their business so that the interest of policy holders is protected.

The terms of reference include the study of RBC approach of the advanced countries like USA, Japan, Singapore etc; 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. The Committee is in the process of deliberations to suggest the road map.

Irda said 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. According to the Irda (Investment) Regulations 2000, a 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 debt instruments and loans and advances of the insurers, to address the spread risk on various categories of debt instruments,” said IRDA in the draft.

In line with these concerns, it has proposed a capital charge ranging between 0.9 and 7.5 per cent, based on the instrument rating, with lower-rated ones having a higher risk charge. 

Rating by credit rating agency Total capital charge (in %)
Central govt and state govt. securities 0
Securities guaranteed by central & state govt 0
AAA 0.9
AA 1.1
A 1.4
BBB 2.5
BB and below 7.5
Unrated 7.5

The regulator said risk charge would also be provided for the debt of general insurers. It added that suitable changes to the regulations were required to make it applicable to general insurers. All stakeholders may send in their feedback within 30 days.



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