Page 100 - India Insurance Report 2023- BIMTECH

88 India Insurance Report - Series II

In short, it can be stated that the Risk-Based Capital framework is significantly more comprehensive
than the existing simple and broad-brush formula-based capital framework in India. It not only includes
several additional risk factors for mathematical estimation of solvency capital required but also considers
other qualitative aspects like risk management, corporate governance and disclosures.

Some of the key attributes of Risk-Based Capital are as follows:

1. Economic and risk-based calibration of financial requirements under Pillar 1

a. Market consistent valuation of assets and liabilities
b. Capital charge to reflect all quantifiable risks associated with them under a pre-defined risk
measurement
c. Recognition of diversification and risk-mitigating mechanisms
d. Possible use of internal models for regulatory purposes

2. New supervisory relationship under Pillar 2

a. Ladder of intervention
b. Incentive to enhanced ERM and Corporate Governance
c. Enhanced group supervision

d. Risk-proportional application (meaning: supervisory response to be proportional to risk of
the insurers)

3. Opening up to the discipline of market scrutiny through detailed disclosure requirements under
Pillar 3

4. Solvency II vs. Risk-Based Capital

One question that could arise in readers’ minds is “What is the difference between RBC and Solvency
II?”. Risk-based capital is a very generic term and can be used for any capital framework that has some
demonstrable relationship with risks to the insurer. It can be used where the relationship between risk
and capital may or may not be very strong or even where all risk elements may or may not be considered
for capital assessment. It is also possible for a capital framework to be called Risk-Based Capital in which
qualitative aspects like risk management, corporate governance, and disclosures may or may not be
considered. As against this, Solvency II is an initiative of European insurance supervisors and has clearly
laid down guidelines which cannot be tampered with. Most of the discussion above about Risk Based
Capital is in sync with the guidelines under Solvency II and broadly aligned with the RBC approach
being followed by developed economies outside of the European Union.

5. India’s Preparedness for Risk-Based Capital

The Indian insurance industry and the Insurance regulator, IRDAI, have been discussing the
implementation of Risk-Based Capital for more than a decade now. Some of the major developments in