Page 115 - Risk Management in current scenario

Industry when Risk-Based Capital (RBC) regime will be implemented in
India, expectedly by 2021. The Committee on RBC set up by the Indian
Insurance Regulator (IRDA) in June 2016 has given its report in July 2017
and has recommended the introduction of RBC regime by March 2021.
The report is available on IRDA website.

The key highlights in the report are:

1. The RBC approach may be based on factor-based model as compared
to internal model used in some markets
2. Qualitative Impact Study (QIS) will be performed which will help in
determining the approach and assessment of parameter value
3. Recommendation on the implementation of Enterprise Risk
Management (ERM)

The impact of this change in the capital calculation will be on key
stakeholders and the way insurance company operates. Some of these
changes are discussed below are my personal opinion based on the
studies available from those markets where RBC has been implemented.

Shareholders

The solvency capital directly comes from the shareholders which cannot
be used for any other purpose than supporting the solvency. The
investment norms on solvency capital money are much stricter which
means that the Shareholder earns a return on this money by around
equivalent to return on G-Sec and therefore loses the right to earn market
return.

This means that shareholders bear the cost of locking this money which
otherwise could have earn higher return. Therefore, shareholders would
like to lock lesser solvency capital and therefore reduce the risk; however,
the current solvency regime does not provide this opportunity as the
capital is not a function of all the risks.

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