Page 97 - India Insurance Report 2023- BIMTECH

India Insurance Report - Series II 85

capital infusion at the time of the formation of an insurance company. The situation changed in 2000
once the industry was opened to private companies and the IRDAI (then IRDA) came up with solvency
regulations known as Insurance Regulatory and Development Authority (Assets, Liabilities, and
Solvency Margin of Insurers) Regulations, 2000. These regulations clearly established the rules for
assessing the capital requirements on the basis of:

1. Class of business;
2. Different volumes of business;
3. Past claims experience;
4. Reinsurance arrangements;
5. Type of assets (regulations defined which assets will be inadmissible for solvency calculations)

These rules clearly defined that a company will be deemed to be technically solvent only when the
Available Solvency Margin is at least 1.5 times the Required Solvency Margin. In these regulations,
the Available Solvency Margin was defined as Available Assets Minus Liabilities, and the Required
Solvency Margin was to be calculated according to a standard formula for all insurers. These rules were
defined separately for Life insurers and General insurers. These regulations are still applicable with some
modifications from time to time to reflect the changing risk environment and solvency requirements.
The current method for solvency margin calculations is based on IRDAI (Assets, Liabilities and Solvency
Margin of Life Insurance Business) Regulations 2016 and IRDAI (Assets, Liabilities and Solvency
Margin of General Insurance Business) Regulations 2016. The current standard formula and factor-
based solvency regulations may be loosely termed the Solvency I regime of capital requirement for
Indian insurers.

The obvious question that should arise in everybody’s mind is, “Is this capital requirement not
Risk Based?” My personal opinion is that it would not be appropriate to say that this capital requirement
has no linkage to risk or that the capital requirement under this regime is completely oblivious to the
risks faced by different insurers. I think a more appropriate statement would be to say that the linkage
between capital and the risks to different insurers is rather tenuous under the current solvency
regime and needs to be strengthened to have a better correlation between the risks of an insurer and its
capital requirement. Having said this, the current solvency regime has served its purpose well during the
formative years of the opening of the insurance industry in India. The success of the current solvency
regime can be gauged from the fact that no insurance company has become insolvent in the country, and
all insurers are diligently maintaining Regulatory Solvency Margin . This begs the question, “What
2
then is Risk Based Capital and how is it different from the current Solvency regime in India?”. We
discuss this in the ensuing paragraph.

2 Some public sector insurance companies have faced solvency problems temporarily but Government of
India has been infusing capital in these companies to keep them solvent.