Market volatility poses valuation problems: IRDA

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Migration to Solvency II

However, in the case of the Solvency II regime as prescribed by the International Association of Insurance Supervisors, assets are expected to be valued on a market-value basis.

IRDA's stand on the valuation also implied that the regulator was expected to move into a regime in line with the banking sector, prescribing a held-to-maturity (HTM) category of securities. The Reserve Bank of India (RBI) allows banks to mark up to 25% of their demand and time liabilities on an HTM basis.

But Hari Narayan also indicated that life insurers would be expected to quickly migrate to the market consistent embedded value (MCEV). The MCEV estimates the future profits of an insurer on the basis of its past premium flows. Studies for migration of life insurers had already been completed, he said. He added, "A guidance note will be issued soon."

For the non-life insurers, studies were still under way, he added.

Only after these studies non-life insurers would be allowed to migrate to the Solvency II regime, he said. Asked whether policy holder funds would also be included for valuation purposes for insurance companies planning Initial Public Offerings, Hari Narayan said, "We are still examining the issues and are in consultation with actuaries for the purpose."

Slower growth

Earlier, Hari Narayan, speaking at the Insurance Brokers' Association said the breakneck pace of growth witnessed in the insurance industry in the past was over.

"A growth of 10% on a CAGR (compounded annual growth rate) basis over the next five years is more realistic."

But he added "We are nervous over the current state of the stock markets and wonder whether the pace of growth is sustainable." The nervousness stems from the fact at least 60 per cent of the policies are in unit-linked products that have a substantial component of investments in equities.

Taken from Business Line