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India Insurance Report - Series II 89

this field are discussed below. By no means is this an exhaustive list of developments, but just a few
major actions taken by IRDAI towards the Indian insurance industry’s journey to RBC.

5.1. Implementation of Economic Capital for the Insurance industry

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IRDAI, vide its order dated 11 March 2010, implemented the calculation of Economic Capital for
Life insurance companies w.e.f. March 2010 and for General Insurance companies w.e.f. March 2011,
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vide its order dated 27 May 2011. The Economic Capital framework was a formula-based approach and
was a diluted version of Risk-Based Capital but was far better than the existing solvency framework in
that it included various other market and other risks in capital calculation and attempted to include
correlation between different Lines of Business. At the time of implementation of Economic Capital, it
was expected that this would replace the existing solvency approach and would be a baby step towards
a full-fledged Risk-Based Capital framework in some years. However, Economic Capital estimation has
remained a parallel activity to the solvency capital estimation, while actual solvency capital required by
insurers and financial statements are based on regulatory prescriptions. Many insurers use it as a Risk
management tool and for the scientific allocation of capital to different lines of business.

5.2.Risk-Based Capital Committee under the Chairmanship of Mr. P.A. Balasubramanian

IRDAI, vide its order dated 1 December 2011, set up a committee to recommend a roadmap towards
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Risk-Based Capital for the Indian Insurance industry under the Chairmanship of a senior Actuary, Mr
P.A. Balasubramanian, who had been a Member (Actuary) of IRDAI and Executive Director of LIC of
India. The committee submitted its report on 22 April 2014. The committee recommended
implementation of RBC with some simplifications to Solvency II guidelines and recommended a Twin-
Peaks approach, whereby the industry’s capital and financial statements will continue to be based on
prudential Solvency Margin regulations while each insurer will estimate a Risk-Based Capital as a parallel
to regulatory solvency capital.

5.3.Exposure draft on Risk-Based Solvency Approach

IRDAI published an exposure draft dated 6 February 2013 on Risk-Based Solvency Approach.
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This exposure draft recommended applying a risk charge on debt assets held by insurers based on the
credit rating of each asset and recommended reducing the control level solvency ratio from 150% to
145%. The exposure draft was not implemented.

5.4.Risk-Based Capital Committee under the Chairmanship of Mr. Dilip Chakraborty

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With the implementation of Solvency II across the European Union effective 1 January 2016 and
significant changes in the life and non-life industry in India in the intervening period, IRDAI set up