Set insurance capital norms on global standard

MUMBAI: The Indian insurance industry will see a lot of its capital freed if domestic guidelines on capital requirement are brought in line with those adopted by regulators in developed markets. Internationally, regulators are moving towards ‘Solvency II’, a framework that assesses the capital requirement of a company based on the underlying risk and volatility of its business. If norms on capital requirements for Indian insurers were brought in line with international guidelines, those companies selling pre-dominantly unit-linked plans would have to set aside far less capital than they do now. “There are some anomalies with the solvency regulations in India and the industry has been raising this issue over and over again. It is a bit strange that ULIPs attract solvency margins whereas they don’t in other parts of the world. Simply changing that rule would result in a significant release of capital,” said Richard Holloway, managing consultant, Watson Wyatt Worldwide. Mr Holloway, who was a member of the working group that developed the framework for risk-based capital in Singapore, added that in coming years there will be pressure on the regulator to take a re-look at the whole capital model for insurance companies, either moving to a risk-based capital approach which is what happened in Singapore or what is now happening in Malaysia. Or, the regulator could move one stage further than that and look at the implications of ‘Solvency II’ for India. The key difference between traditional insurance products and unit-linked insurance plans is that under most ULIPs, the entire investment risk is borne by the policyholder. In India, the capital framework was put in place before the insurance market moved to ULIPs. While ‘Solvency II’ takes into account the lower risk on meeting policyholder liabilities, it also expects insurers to set aside higher capital if there is an asset-liability mismatch in their portfolio. Indian insurers say the regulator is not yet looking at moving to a risk-based capital framework. One reason for the regulator’s reluctance could be the uncertainty over investor behaviour in a turbulent market. “I think time will tell how affected the Indian insurance industry would be from movements in the stock markets. What experience would the industry have if the market turns volatile and starts jumping about a bit? It will be interesting to see what impact that has on policyholder behaviour,” said Mr Holloway. He added that this is uncharted territory for insurers anywhere in Asia. “We haven’t had that volatility in markets since 1997. To be honest, in 1997 in Asia Pacific there were very few examples of countries selling unit-linked products. It is a risk, but how serious a risk I really don’t know,” he said. The solvency framework for the insurance industry is the banking industry’s equivalent of capital adequacy framework. The global standards for capital adequacy framework are issued by the Bank for International Settlements in Basel. The Indian banking regulators have adopted Basel II — as the new capital adequacy framework is known. Capital is a bigger issue for life insurance companies as their profits come over a period of time and promoter investment in the insurance industry has turned out to be much higher than in banking.

Source: Economic Times