MC EXCLUSIVE IRDAI likely to notify risk-based capital norms in Aug, phased rollout to follow

IRDAI likely to notify risk-based capital norms in August

The Insurance Regulatory and Development Authority of India (IRDAI) is likely to notify the long-anticipated Risk-Based Capital (RBC) framework as early as August 2025, according to people familiar with the matter.

The RBC framework would mark a shift in how insurers calculate and hold capital.

The final framework is expected to include a phased implementation likely stretching between 2025 and 2027, sources told Moneycontrol. The timeline is driven by the need for insurers to upgrade their internal systems to handle risk assessment, data management, and regulatory reporting.

Larger players such as ICICI Prudential Life Insurance and SBI Life Insurance have already initiated internal reviews to assess their preparedness for the upcoming framework, the sources added.

Consultations between IRDAI, its actuarial members, and industry bodies such as the Life Insurance Council and General Insurance Council are expected to take place in the next couple of days.

An email sent to IRDAI remained unanswered until the time of publication.

India’s current solvency regime for insurance companies is based on a factor-based framework.

This system applies uniform capital requirements to all insurers, regardless of their business models or risk exposure. Essentially, insurers are required to hold a fixed percentage of capital relative to metrics like premiums or claims, using broad assumptions.

While this makes the framework simple and easy to apply, it does not account for the specific risks each insurer may be taking on. As a result, it may lead to scenarios where some insurers hold more capital than necessary, while others hold too little, based on their actual risk levels.

The proposed RBC framework represents a shift from this one-size-fits-all approach.

Under the RBC regime, capital requirements are linked to the risk profile of each insurer. This means that insurers will need to assess and report their exposure to various categories of risk, including underwriting risk (the possibility of incurring losses from the insurance business), market risk (fluctuations in interest rates, equity prices), operational risk (losses from system failures, fraud, or process errors), and investment risk (concentration or poor quality of assets).

By taking these risks into account, the objective of the RBC system is to ensure that insurers maintain sufficient capital buffers to absorb potential shocks to their businesses.

The RBC-based model is already present in countries like Singapore, Australia, Germany, France, and Netherlands.

IRDAI's journey in this direction began mid-2023, when it launched its first Quantitative Impact Study (QIS). Through the QIS, insurers were asked to submit detailed data using revised capital calculation methods aligned with the proposed RBC norms. This allowed the regulator to assess how the new approach would affect different types of insurers such as life, non-life, and reinsurers, based on their unique risk exposures.

The initial round of the QIS concluded in November 2023, and was followed by multiple rounds of technical consultations and data refinement exercises between the regulator and industry participants.

Sources say the IRDAI has incorporated much of the industry’s feedback into the evolving framework.

To ensure a smooth and balanced transition, the regulator is now preparing a phased rollout strategy. Sources said that this staggered implementation is aimed at giving insurers sufficient time to build the necessary internal capacity for the model without disrupting day-to-day operations.