Some life insurance companies plan to move IRDAI, seeking a risk-based solvency regime for unit-linked insurance plans (ULIPs), where the risk is borne by policyholders.
If the regulator gives a nod to this proposal of the life insurance companies, then the capital blocked for ULIPs will come down, which will boost the solvency margins of insurers and release capital for other purposes.
Currently, the insurers follow a rule-based solvency regime. As a result, insurers’ assets are required to be 1.5 times, or 150 percent, of their liabilities. The minimum solvency ratio insurance companies must maintain is 1.5 to lower risks. In terms of solvency margin, the required value is 150 per cent. The solvency margin is the extra capital the companies must hold over and above the claim amounts they are likely to incur. It acts as a financial backup in extreme situations, enabling the company to settle all claims.
Once the risk-based solvency regime is implemented, insurance companies will have to hold capital in proportion of the business they write Riskier the business, higher is the capital requirement.