From the next fiscal, insurance companies will have to maintain a solvency margin of 145% instead of the 150%. The Insurance Regulatory and Development Authority (Irda) has decided to move towards a risk-based solvency approach and has constituted an expert committee to suggest the road map.
By moving towards a risk-based solvency approach, it will deter insurers from investing in risky assets. The market risks that will be covered include interest rate risk, equity risk, property risk, spread risk and concentration risk. Insurers are required to invest funds following Irda’s guidelines. Currently, though majority of funds need to be invested in government securities and approved investments, no risk charge is provided to the insurers who invest in more risky investments. The regulator, in a draft exposure, has decided to define the percentage to adopt the risk-based solvency approach in line with the Solvency-II norms on capital adequacy requirements.
Solvency margin is the amount by which the assets of a life or non-life insurer exceed its liabilities and is a part of the shareholders’ fund and not policyholders’ fund. For a policyholder, looking at the solvency margin of insurance companies is important as it will determine whether it is in a position to pay claims. In fact, an insurer will be insolvent if its assets are not adequate or cannot be disposed of in time to pay policyholders’ claims.
Analysts say it is important to look at the solvency margin of private life insurance companies as they are not backed by the government and are more susceptible to market risks. In fact, at the end of March 2012, all the 24 life insurers complied with the stipulated requirement of solvency ratio of 1.5. Life Insurance Corporation of India reported a solvency ratio of 1.54, which was the same as at the end of March 2011. Data from Irda show that as on March 2012, 22 private life insurers have maintained the solvency ratio at above 1.70 out of which 17 had the solvency ratio at above 2.50. Of course, high solvency margin could also mean that the company is simply