Risk Based Capital in the Indian Insurance Industry
“Risk- Based Capital is recommended by the Committee to IRDA to be used for the purpose of Solvency assessment. What could be the possible impact of RBC regime on the Indian Insurance Industry is discussed in the write-up”
Background
Insurance Companies in India is to keeps reserves to meet the future liabilities, these reserves are kept based on prudential regulatory norms. However, regulators also prescribe additional money that the insurance companies must keep aside in a form of solvency capital to meet the contingency if it arises. Such money cannot be used for any other purpose.
This Solvency capital in India is currently calculated based on two-factor approach, which however does not take into the account of all the risks that insurance company faces. There is a shifting world over on the calculation of capital based on all the risks that company faces as opposed to two-factor approach currently used, commonly known as Risk-Based Capital (RBC) Approach.
Introduction
This write-up assesses the high-level likely impact on the Indian Insurance Industry when Risk-Based Capital (RBC) regime will be implemented in India, expectedly by 2021. The Committee on RBC set up by the Indian Insurance Regulator (IRDA) in June 2016 has given its report in July 2017 and has recommended the introduction of RBC regime by March 2021. The report is available on IRDA website.
The key highlights in the report are:
- The RBC approach may be based on factor-based model as compared to internal model used in some markets
- Qualitative Impact Study (QIS) will be performed which will help in determining the approach and assessment of parameter value
- Recommendation on the implementation of Enterprise Risk Management (ERM)
- ERM may be proactively implemented in conjunction with the Board, which will not only help in optimizing the Capital but also help in developing and implementing the ERM model within the Company.
- Such ERM implementation will also help in building the risk culture across the organization.
- Focusing on the product design which optimizes the capital given the risk appetite of the Company. Because there will be diversification effect of different risks, product classes and risks may be chosen which provide this advantage. For example, annuity and term product portfolio will bring down overall risk as longevity risk and mortality risks are negatively correlated.
- Improving the customer satisfaction level
- Once the details of the parameter values are known, there will be players who can take advantage of investment norms based on their product design. The investment norms may also drive the choice of product design.
About the Author
Sonjai Kumar is a Risk Professional with 24 years of experience in Life Insurance Sector focusing on Insurance, Risk and Actuarial. He is awarded with “Risk Officer of the Year” 2017 award. He is currently working at Aviva India Life Insurance Company.
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