IRDAI to introduce new solvency norms

“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," said Khuntia, while addressing the 22nd annual insurance and pension summit organized by the confederation of Indian Industry (CII).

“We are also looking to introduce risk-based supervision norms, which is required so that those companies which 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," said Khuntia.

On 26 August, Mint first reported that Irdai is likely to review the key norms, favouring candidates that are resilient to 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.

At present, it is mandatory to maintain a solvency margin of 150% for every insurer, irrespective of the amount of risks that the promoting entities of the insurer carry or the extent of liabilities that arise from the pricing of the insurance policies. Solvency margin is the extent to which an insurance company’s assets exceed its liabilities.

Irdai’s imminent revision of the solvency margin threshold of 150% could be crucial because the solvency ratio of many life and general insurers has been deteriorating and are close to the regulatory minimum of 1.5.

In order to maintain a healthy solvency margin, either the promoters need to infuse capital, or they need to earn profit through sales of a large number of policies for many years or minimize expenses and liabilities drastically.

For every insurer, initial capital is important to bear the losses, expenses and claims during the first five years, and if any of the joint venture partners are unable to bring in capital, the solvency margin of the insurer may be impaired.

Irdai wants to ensure that every insurer has enough capital at hand at the point of entry as well as to maintain a healthy solvency margin to remain afloat.

The Irdai chairman also said that the regulator wants insurers to improve their persistency ratio (the percentage of policyholders who renew their policies every year).

“The 13-month persistency ratio should not be below 90%. Insurers should work on this direction. The interest of insurers should not be to exploit surrenders of policies," said Khuntia.

Irdai feels that insurers should contribute more towards economic development, create more employment and design new type of insurance policies such as those covering income losses, title insurance in real estate, policies covering risks of solar energy companies and so on.

“Apart from the need of more pension and annuity products, we need to innovate new products. India is emerging as a solar energy power, where we need insurance. Corona insurance was required and it was rolled out. About 28 lakh lives have been covered under Corona Kavach policy for ₹1.02 trillion since 10 July. But, lakhs of migrants went to their hometown and villages due to the lockdown. They lost their incomes. So, people also need income loss insurance products. Only 0.9% dwelling units are insured. We will roll out dwelling units insurance shortly; people should not suffer from loss of homes," said Khuntia.

Insurers have total assets under management of ₹42.5 trillion, which is abut 21% of India’s GDP. Last fiscal year, out of the total premium of ₹7.5 trillion collected by insurers, ₹4.5 trillion was contributed towards economic development, said Khuntia. Around 43 lakh people are employed in the insurance sector, of which 29 lakh are agents.

Khuntia said 10 lakh more people can be employed in the insurance sector in the next three years.

Only 19% lives in India are covered under insurance at present and only 4% of India’s senior citizens have annuity products, which should be improved, said the Irdai chairman.

Khuntia said the insurance industry has a bigger role to play when other sectors are in a difficult situation.

However, a wave of financial stress at insurers, especially those run by non-banks and over-leveraged corporates, has stirred concerns about the ability of the promoters to support the business amid tight liquidity conditions, insolvency issues and the slump in business caused by the covid pandemic.

Insurance is a capital-guzzling business, requiring a constant infusion of capital by promoters in the initial years. This is because the cost requirements of basic office operations, creating sales reach, settling claims and building volumes take several years. The financials of non-bank lenders have weakened since 2018 following the crisis at Infrastructure Leasing and Financial Services Ltd, which, in turn, has made it tough for them to support their insurance units. To make matters worse, there has been a slump in premium incomes because of the lockdown.