If an insurance company writes more of group health business where the claims instances are high, they will be required to maintain a higher level of capital.
The insurance sector will be moving to the risk-based solvency or Solvency II regime in the next two years. Considering that risks will be proportional to the type of business written by the companies, sources said that it is likely that PSU insurers will be required to hold more capital.
"Several public sector insurers are engaged in riskier businesses in areas like group health and marine hull that have high claims risks. Hence, it is likely that they will have to hold more capital," said an official.
This regime could come into effect from April 2021. Public sector insurers include New India Assurance, United India, Oriental Insurance and National Insurance and Agriculture Insurance Company.
At present, insurers' assets are required to be 1.5 times, or 150 percent, of their liabilities. Once risk-based capital (RBC) framework comes into place, insurance companies will have to hold capital in proportion of the business they write. Riskier the business, higher is the capital requirement.
Hence, the solvency that stands at 1.5 times could rise to 3.5-4 times depending on the risks written by the insurer.
This is to ensure that the companies have adequate reserves in case there is a large claim on the books. Further, companies not wanting to maintain large cash reserves will have to rejig their portfolio towards less-riskier business.
Initially, RBC was to be implemented from April 1, 2019. However, considering the fact that the industry did not have the systems in place to implement it, it was pushed by a year. Now, it is likely to be pushed to April 2021 or FY22.
Insurance Regulatory and Development Authority of India (IRDAI) said that RBC will first be introduced for the insurance sector, followed by intermediaries.
Once Solvency II is introduced, insurers will have to redeploy staff for better risk assessment. At a later stage, IRDAI will assess each insurer based on its ‘risk profile’ and will focus on entities that have a higher risk compared to others.So, if an insurance company writes more of group health business where the claims instances are high, they will be required to maintain a higher level of capital. This is to ensure that the claims-payment abilities of insurers are not impacted by their business decisions.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.