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Insurance Regulator IRDAI May Tighten Rules for Companies
27-Aug-2020
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The insurance regulator is likely to tighten licence norms, favouring candidates that are resilient to deep and prolonged crises, said two people with direct knowledge of its policymaking processes, including a government official.

“Only entities that are financially strong enough, not only at the time of entry but also during tough liquidity phases for 5-10 years, may get a licence to launch or acquire an insurance company," said one of the two people cited above, requesting anonymity.

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 business caused by the covid pandemic.

Plugging the gaps.

“Capital requirement norms and exposure parameters of promoters may need to be strengthened. Stronger promoter financials should be the new licence criteria," the second person said, adding that the Insurance Regulatory and Development Authority of India (Irdai) is examining the issue.

“Irdai may review and tighten the norms relating to minimum paid-up equity capital, reserves, sum at risk, solvency, and so on. If the debt position of the promoter is too high, Irdai may not grant insurance licence to such an entity," said the first person.

Irdai feels this amount needs to be raised so that the insurer has enough capital to carry on business for at least five years, without requiring additional capital infusion.

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.

It is mandatory to maintain a solvency margin of 150% for every insurer.

Since promoters of many insurers are not in a position to infuse capital because of the tight financial situation at the parent level, the regulatory requirement of paid-up capital under the new norms may be increased. This will not only ensure enough capital at hand for the insurer but also keep the solvency margin healthy to remain afloat.

Irdai is also evaluating increasing the solvency margin threshold from 150%. This is 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.

Irdai may also revise the norms on reserves that insurers need to maintain. Reserve is basically the cash position that will eventually grow to cover say the death benefit in its entirety by a certain age.

An email sent to Irda chairman did not elicit any response.

Source : Live Mint back
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