New Irda model to give life cos more financial stability

Saturday 20, March, 2010 Life insurers will see more financial stability in their business, with the insurance regulator mandating them to adopt a new model to assess various risks and compute the capital needed to cover such risks from end-March, this year. The model, economic capital in technical parlance, allows insurers to factor in various types of risks — including insurance, market, credit and liquidity risks — quantify them, and charge capital accordingly. The amount of capital that a company needs to earmark would depend on the type of business it underwrites. The capital requirement will be higher for products with a guaranteed return and lower for a product that has no guarantee like the Unit-Linked Insurance Plan (ULIP). ULIPs, one of the hottest products in a bull run, constitute more than 70% of the portfolio for most private insurers. If more capital is released, it would help boost the profitability of the life insurance company. With some life insurers like Reliance Capital planning to launch IPOs, economic capital requirements would help investors get a clear view of the performance of the company. Currently, insurers compute their capital requirement based on a standard formula. They have to comply with the solvency margin — the excess of assets maintained by an insurer in the interest of policy holders — requirement of 150% prescribed in the regulation. If the margin of the insurer is, say, 200%, the extra 50% can be used to write new business. The economic capital model marks a shift from the existing solvency regime as insurers will be able to have a clearer understanding of their risks and quantify such risks better. According to an Irda circular to CEOs of life insurance companies, an insurer who adopts the model has a 99.5% chance of remaining solvent with the financial strength to pay claims of policy holders. It would, therefore, provide a safety net for policy holders as well. “This is the first step in moving towards risk-based capital,” according to R Kannan, member Irda.

[ Back to News Room ]

Back to Top^