IRDAI in process to migrate to risk-based capital regime

Insurance regulator IRDAI on Tuesday said it is in the process of moving towards the risk-based capital (RBC) regime to improve protection for policyholders.

It last year had set up a 10-member steering committee to help implement the new risk-based capital regime by March 2021.

“We have started the process of moving to risk-based capital system. It will of course take a little time but it will be done eventually in a couple of years,” Insurance Regulatory and Development Authority of India (IRDAI) chairman SC Khuntia said on the sidelines of the CII Insurance and Pension Summit on Tuesday.

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The decision to move to the RBC structure from the current solvency principle regime was taken after recommendations of a panel which gave its report in July this year, IRDAI had said in a notification last year.

A shift in regime was felt because the current solvency-based rules do not help in assessing whether the capital held is adequate enough for the risks inherent in the insurance business, it had said.

Khuntia said if risk-based capital system is there, then additional capital doesn’t have to remain idle.

“It will help those companies who manage their risk well,” he said.

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Insurance industry has made a request to allow increase the limit to raise capital through tier-II bonds.  Currently they are allowed to raise up to from 25 per cent of their net worth from tier-II bonds.

“That request has been made today. This would be possible only when we move to risk-based capital regime,” he said.

The regulator is also starting to work on risk-based supervision for the insurance sector, according to Khuntia.

“Those who are at greater risk will require more intensive work, while those who do not display these kinds of risky behaviour need a light touch as far as supervision is concerned,” he added.

Talking about the recent downgrade of bonds of IL&FS by some rating agencies, Khuntia said in events like these, insurance companies have to decide prudently on their investments.