Insurance: The Risk Factor

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SummaryIrda’s move towards a risk-based solvency approach will deter insurers from investing in risky assets.

not investing and is sitting on its cash pile.

Under Section 64VA of Insurance Act, 1938, every insurer will have to maintain an excess of the value of assets over the amount of liabilities of not less than an amount prescribed by Irda. The Irda annual report for 2011-12 underlines that one of the important factors that influences insurance penetration is the capital requirement under the solvency margin. Emphasising that since pure term products provide simple life cover, companies should design products, which could reach various segments of the population in meeting their insurance needs and enhance insurance penetration. In line with this objective, the regulator had decided to allow the life insurers to reduce the capital requirement in the case of pure-term products without changing the factors loading in the case of the remaining products.

Typically, for an insurance company assets are fixed and investment assets, whereas liability is future payouts like claims, surrender benefits and maturity benefits and based on future projections of these payouts, an insurer will arrive at its liability. The Irda has suggested that risk charge should be applied for all mandated and non-mandated assets of the insurer. For life insurers, assets pertaining to the non-linked business should only be considered as the risk pertaining to the linked business is being borne by the policyholders. For life insurance companies, the minimum solvency will be the policy reserve as disclosed by an actuarial valuation of the liabilities and for non-life insurance companies it will be based on the net premium or net claim.

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