IRDA balking at migration to new solvency norms

Non-acceptance by some insurers; Regulator opts for step-by-step approach
Bangalore, July 19 Implementation of Solvency II guidelines prescribed by the International Association of Insurance Supervisors (IAIS) is likely to be delayed in the country.

The Insurance Regulatory and Development Authority (IRDA) made it clear that it was no hurry to implement Solvency II guidelines.

Its Chairman, Mr C.S. Rao, said: “We are in no hurry to immediately implement the guidelines.”

The IAIS final guidelines released in February this year address material risks that insurers face — underwriting risk, market risk, credit risk and operational risk.

Solvency margin is the excess of the value of assets and capital that non-life insurers have to maintain over the insured liabilities.

Solvency regime

Under the current solvency regime, insurers are expected to maintain a 150 per cent margin over the insured liabilities. Solvency II however, does not imply any change in the margin. The new guidelines make the solvency margins dynamic.

But according to industry sources, the regulator’s balking at migration to Solvency II guidelines has more to do with the ground situation in the country. This implies that some of the insurers are simply not ready for migration. The situation is somewhat identical to the situation faced by the banking sector’s migration to the Basel II capital standards. Solvency II is the insurer’s equivalent of the Basel II.

Step-by-step approach

Instead, the insurance regulator has opted for step-by-step approach. As the first step, life insurers are now expected to file their audited reports on solvency compliance on a quarterly basis effective from this financial year. For the non-life sector, the IRDA has indicated that the reporting would be done on a half-yearly basis, though this is likely to begin only after the completion of tariff deregulation.

However, the public sector Oriental Insurance Company Chairman and Managing Director, Mr M. Ramadoss, said: “We are ready for moving into half-yearly reporting. This is not an issue. It is up the regulator to decide the timeframe.”

Complete transition

The migration though would still be short of a complete transition to Solvency II. This is because the asset valuation is currently done on a year-end basis. A half-yearly solvency regime would imply that the asset valuations would also have to be on similar terms.

“Yes valuation of investments would have to be done on a half-yearly basis. Equities could be done on a half-yearly basis. For Government securities we need a regulatory direction,” Mr Ramadoss said.

Government securities are still valued on a book value basis by the insurers.

Moreover, some of the western countries that have implemented advanced management information solutions (MIS) are also yet to fully accept the IAIS guidelines, the sources added.

The absence of such MIS in the Indian insurance industry is a major stumbling block for migration to new solvency guidelines.

Only the private sector is in readiness for the migration, though they account for only about 30 per cent of the domestic market.

Source: The Hindu Business Line