The benefit of adopting a risk-based supervisory framework will be a structured approach to help assess various risks, both internal and external.
The insurance regulator will soon adopt risk-based supervisory framework (RBSF) for supervision of the insurance industry. It will review all the current regulatory and supervisory process and prepare an appropriate framework for holistic supervision.
At present, Insurance Regulatory and Development Authority of India (Irdai) focuses on compliance-based approach for supervision. As the number of companies has increased, to supervise on compliance approach would need the same yardstick to be applied to all companies, regardless of their size and business model.
The regulator has said that RBS process will be rolled out in a phased manner starting with insurers and then intermediaries, after running a pilot project on select entities to test the efficacy of the implementation.
The benefits of adopting an RBS framework will be structured approach to help assess various risks, both internal and external. There will be due focus on the responsibility of the board and senior management of the entities to ensure financial soundness. This will help identify various risks related to market conduct and prudential aspects so that an early-stage intervention is possible.
The regulator is also likely to move to risk-based capital regime to improve protection for policyholders. At present, it follows solvency based rules which do not help in assessing whether the capital held is adequate enough for the risks inherent in the insurance business. A shift to risk-based capital will help companies as the additional capital need not remain idle and will help those companies who manage their risk well.
Also, the insurance industry has made a request for upping the limit on raising capital through tier-II bonds. However, this will be possible only when the industry moves to risk-based capital regime.
At present, they are allowed to raise up to 5% of their net worth from tier-II bonds.
Experts say the volatile stock markets has made it pertinent for deeper evaluation of market risks. There is increasing concern for protection of policyholders’ benefits, promoting efficient risk management practices and greater analysis of capital invested. The risk-based capital process will help the financially sophisticated shareholders as globally the industry has moved to RBC.
So adoption of risk-based capital process will raise the overall prudential standards in the industry, link the level of required capital with the inherent risks, facilitate early and effective intervention by the regulator and maintain policyholders’ confidence in the system. The regulator had constituted two committees—on roadmap for risk-based capital approach in insurance sector; and on risk-based capital approach and market consistent valuation of liabilities. Both committees had submitted their reports.
Changes in companies
In the process of moving towards RBS, there will be changes in the way companies function. Irdai has underlined that they will need to have well-defined standards of governance and well-documented policies, procedures and practices in place to outline the responsibilities and accountability. “The companies will have to revisit the organisational structure to align with the requirement of RBS,” the Irdai’s note says. Companies will have to augment their IT and MIS to capture and report various elements required for risk assessment. They will have to review skill-sets of employees, impart extensive training, redeploy staff and retain talent needed to move towards risk assessments in place of mere compliance.