As in immediate future, not all domestic insurance companies are ready to adopt Solvency II mechanism, hence, it may take longer time than expected to be implemented in India. As only some large private insurers and state-owned insurers are ready for the transition, it may take 4-5 more years to be implemented.
In February 2013, the Insurance Regulatory and Development Authority (IRDA) has proposed a lower solvency margin for insurers at 145% against 150%, after including a risk charge.
Solvency II norms are to insurers what Basel-III norms are to banks. These norms are made up of provisions related to the capital requirements of companies, regulatory assessment of a specific firm’s risk and the regulator’s broader supervision of the entire market.
Solvency-II is a European Union legislative programme to be implemented in all 28 European Union member states. It introduces new, harmonized EU-wide insurance regulatory regime. Its objective is to have a uniform policyholder protection across countries through a robust system. This will enable a regime that will have sharper pricing and better allocation of capital, since solvency will be based on the risks.
Insurers say that India does not have required statistical database to adopt Solvency-II norms. At present, domestic insurers use factor-based processes for arriving at the solvency margin and hence moving into a completely different system will take time.
IRDA had earlier said that the requirement would be applicable from FY’14 and a certificate needed to be furnished on March 31, 2014. It had proposed to impose a risk charge for debt investments of insurers. According to IRDA regulations 2000, a majority of funds need to be invested in government securities and approved investments, and no risk charge is imposed on insurers which invest in riskier instruments.
Solvency-II Has not yet comes into force in the European Union hence, it would be wrong to assume that India will adopt it immediately, say insurers.
India’s expert committee will take reference from the study of risk-based capital approach of advanced nations such as Japan, Singapore and US and study of Solvency-II approach followed by some Indian life insurers. The committee is also expected to suggest the methodologies for market risk arising from interest rate risk, equity risk, property risk, spread risk and concentration risk.
IRDA said all mandated and non-mandated assets of insurers would have risk charge applicable to them. Assets of non-linked businesses would be considered for risk charge for life insurers, as risks for linked businesses are borne by the policyholders.
According to IRDA, loans and advances should be categorized according to the ratings of counter parties. For Non Performing Assets (NPAs), IRDA said insurers if followed the provisioning norms required by them, no separate risk charge would be applicable.
Further, the IRDA also said that the risk charge would also be provided for the debt of general insurers.