Page 37 - Insurance Times August 2020

The authority doesn't see the need for general relaxation. 1. Submit Board approved action plan to the Authority
However, any specific issues would be considered on merit. by 30 June 2020 for phasing out the treaties along
The GI Council had also said that given the huge mark-to- with timelines such that there is compliance with
market (MTM) losses in equity investments during March, solvency stipulations. The plan of action shall also
IRDAI should allow firms not to account for diminution in include an assessment of any requirement for
the value of equity investments while finalizing accounts for capital infusion and sources of funds for the capital
the financial year ended 31 March 2020. The GI Council had infusion where required due to prospective closure
also requested that firms be allowed to consider MTM of these capital gearing treaties.
position as on 29 February 2020 as the basis of computing 2. the direct insurers (cedents) shall create
solvency. "Alternatively, IRDAI may relax the minimum appropriate reserves towards Unearned Premium
solvency requirement of 1.5x for the time being," the letter Reserves, Premium Deficiency Reserves,
had suggested. Many firms may see their solvency ratio fall Outstanding Claims Reserves (including IBNR/
below 1.5 due to the crisis. IBNER) in accordance with IRDAI regulations.
Further, such treaties have to be accounted for in
No fresh capital gearing treaties: their financial statements, based on the principle
The IRDAI has warned insurers against entering into fresh of "Substance over Form".
capital gearing treaties, and to phase out existing treaties.
The regulator says that it has observed that some insurers Establishing the international financial
have entered into such arrangements in various forms service centres:
including Quota Share Reinsurance Treaty. In a circular
The Finance Ministry has issued a notification establishing
dated 28 March, addressed to general insurers, health
the International Financial Services Centres Authority (IFSCA)
insurers and specialized insurers.
to unify supervision over all financial services in international
financial services centres (IFSCs) in the country. IFSCA will
The terms of these treaties have been examined, and the
Authority is of the considered view that such capital gearing be headquartered in Gandhinagar in Gujarat, as per the
treaties are of the nature of financial arrangements and not notification. Currently, the banking, capital markets and
primarily a risk transfer mechanism. It appears that insurers insurance sectors in an IFSC are regulated by multiple
have adopted these arrangements in order to improve the regulators such as Reserve Bank of India (RBI), Securities
solvency margin ratio. The IRDAI thus directs the insurers and Exchange Board of India (SEBI) and IRDAI. The
notification brings into effect certain provisions of the IFSCA
to adhere to the following:
Act, 2019.
a. no insurer shall enter into any fresh capital gearing
treaties effective from the date of issuance of the The central government has refrained from fully enabling
circular (28 March); and the new authority with all its powers as envisaged in the
b. Insurers which have such treaties on their books as on Act. While allowing for the appointment of IFSCA members
the date of issuance of the circular shall take the and other employees, setting up of funds and exemption
following steps: from taxes, the government has not affected fully provisions
for IFSCA pertaining to the regulation of financial products,
financial services and financial institutions and its abilities
to transact in foreign currencies and make rules. This means
that the main function of the IFSCA will be to regulate
financial products such as securities, deposits or contracts
of insurance, financial services, and financial institutions that
have been approved by the relevant regulator for the
particular financial services sector.

The IFSCA board will comprise a chairperson, and one member
each nominated by the regulators, SEBI, RBI, IRDAI and the
Pension Fund Regulatory and Development Authority. There
will also be two members from the central government and
full-time or part-time members. A working group of the

The Insurance Times, August 2020 37