Insurers want new capital framework to be pushed to April 2022

Insurance companies will seek another extension of the risk-based capital (RBC) framework from the regulator. Sources told Moneycontrol, insurers will seek an additional 12 months for implementing RBC.

The present deadline for the new regime to kick off is April 1, 2021.

“While we have been given time till FY21, it may not be adequate. Hence, we will request the Insurance Regulatory and Development Authority of India (IRDAI) for time till April 2022 to enable the systems to be put into place,” said a senior insurance executive.

Under the RBC framework, insurers will not only be required to set aside more funds for their business but also have to re-price their insurance products. For those writing riskier businesses with high claims, the product premium will be increased.

Currently, insurers’ assets are required to be 1.5X or 150 percent of their liabilities. Once risk-based capital (RBC) framework comes into place, insurance companies will have to hold capital in the proportion of the business they write. Riskier the business, higher is the capital requirement.

This is to ensure that the companies have adequate reserves in case there is a large claim on the books. Further, companies not wanting to maintain large cash reserves will have to rejig their portfolio towards less risky business.

Insurers have asked for an extension since migration to the RBC will involve setting up a separate accounting system for each product category, moving existing products to that segment and product-wise re-pricing based on how risky the business is. In between this migration, a new product regime is also expected to be introduced by IRDAI and insurers are likely to be involved in product refiling to meet those requirements in 2020.

Multiple deadlines

Initially, RBC was to be implemented from April 1, 2019. However, considering the industry did not have the systems in place to implement it, it was pushed to April 2021.

IRDAI has said the RBC will first be introduced for the insurance sector, followed by intermediaries.

Once it is introduced, IRDAI will assess each insurer based on its ‘risk profile’ and focus on entities that have a higher risk compared to others.

In the financial sector assessment programme of 2017, IMF and World Bank recommended that IRDAI moved towards an RBC supervisory regime. In Europe, several insurers and reinsurers have adopted the Solvency II regime where the solvency capital is directly proportional to the risks written by them in their books.

India currently follows Solvency I or a factor-based solvency capital model. This means a set factor (3 or 4 percent) is multiplied with the mathematical reserves to arrive at the minimum capital that is to be held by insurance companies.