Shifting to half-yearly solvency reporting in line with global practices
Bangalore June 19 In a bid to improve solvency monitoring, non-life insurers in the country are quietly being prepared to migrate to a half-yearly reporting regime.
The Insurance Regulatory and Development Authority (IRDA) Chairman, Mr C.S. Rao, told Business Line, "After shifting to a deregulated tariff regime, it is necessary that solvency should also be monitored more frequently. We prefer a half-yearly audited reporting."
Currently, only life insurance companies have migrated to a quarterly reporting of solvency, beginning this financial year.
Non-life insurer's solvency reporting is still done on an annual basis though deregulation of tariff regime was introduced from the beginning of this financial year. The insurance regulator's prescribed solvency margin is 150 per cent.
The Insurance Regulatory and Development Authority (IRDA) Chairman, Mr C.S. Rao, told Business Line, "After shifting to a deregulated tariff regime, it is necessary that solvency should also be monitored more frequently. We prefer a half-yearly audited reporting."
Currently, only life insurance companies have migrated to a quarterly reporting of solvency, beginning this financial year.
Non-life insurer's solvency reporting is still done on an annual basis though deregulation of tariff regime was introduced from the beginning of this financial year. The insurance regulator's prescribed solvency margin is 150 per cent.
Solvency margin
Solvency margin is the excess of the value of assets and capital that non-life insurers have to maintain over the insured liabilities. Mr Rao said IRDA has not yet decided on the timing of the introduction. However, the regulator is in discussion with the non-life insurers for accelerated introduction, he added.
IAIS guidelines
The reporting would be on the basis of the total balance sheet, instead of segment-wise reporting. This is an approach that has been suggested by the International Association of Insurance Supervisors (IAIS) in its final guidelines for migration to the Solvency II regime. The IAIS final guidelines released in February this year addresses material risks that insurers face — underwriting risk, market risk, credit risk and operational risk.
Mr Rao said IRDA shift to half-yearly monitoring was in line with global practices followed by insurance supervisors and partly in line with the IAIS guidelines.
However, this kind of monitoring would bring more volatility in capitalisation requirements of insurance companies. This is particularly in an environment where the probable maximum loss ratios could change in the event of catastrophic events, including natural calamities with consequent changes in underwriting risks.
Besides, sources said that what could also alter the capitalisation requirements would be the change in the value of the assets (market risks) particularly investments, as insurers begin shifting to a value at risk basis method of valuations. Almost all the insurers have shifted to a marked to market basis valuing of investments, though this is currently done only on an annual basis.
Already non-life insurers have been hit by depreciation in the value of government securities, and other debt securities that comprised the bulk of their investments.
A shift to half-yearly or quarterly basis, the sources said, would in turn, imply that either the insurers bring in additional capital to meet the solvency requirements or resize their insured liabilities by ceding some liabilities to reinsurers, the sources said.
Private sector insurers, to ensure compliance to the current tight solvency guidelines, are doing ceding liabilities on a large scale both to the national reinsurer GIC and to global reinsurers through the treaty and non-treaty routes - facultative or excess of loss reinsurance (spot covers).
The reporting would be on the basis of the total balance sheet, instead of segment-wise reporting. This is an approach that has been suggested by the International Association of Insurance Supervisors (IAIS) in its final guidelines for migration to the Solvency II regime. The IAIS final guidelines released in February this year addresses material risks that insurers face — underwriting risk, market risk, credit risk and operational risk.
Mr Rao said IRDA shift to half-yearly monitoring was in line with global practices followed by insurance supervisors and partly in line with the IAIS guidelines.
However, this kind of monitoring would bring more volatility in capitalisation requirements of insurance companies. This is particularly in an environment where the probable maximum loss ratios could change in the event of catastrophic events, including natural calamities with consequent changes in underwriting risks.
Besides, sources said that what could also alter the capitalisation requirements would be the change in the value of the assets (market risks) particularly investments, as insurers begin shifting to a value at risk basis method of valuations. Almost all the insurers have shifted to a marked to market basis valuing of investments, though this is currently done only on an annual basis.
Already non-life insurers have been hit by depreciation in the value of government securities, and other debt securities that comprised the bulk of their investments.
A shift to half-yearly or quarterly basis, the sources said, would in turn, imply that either the insurers bring in additional capital to meet the solvency requirements or resize their insured liabilities by ceding some liabilities to reinsurers, the sources said.
Private sector insurers, to ensure compliance to the current tight solvency guidelines, are doing ceding liabilities on a large scale both to the national reinsurer GIC and to global reinsurers through the treaty and non-treaty routes - facultative or excess of loss reinsurance (spot covers).
Source: The Hindu Business Line
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