Insurance: The Risk Factor
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
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