Towards a safer dawn

The Insurance Regulato
02 January 2004

These rules are a welcome beginning in prescribing a written code for insurers and intermediaries and spelling out their role and obligations — both at the time of pre- and post-sales — to the policyholders. It should also be noted that policyholders' interest has another dimension — financial security.

It is imperative that the insurers have the continuous financial soundness and viability, enabling them to honour their commitments to the policyholders as and when a claim arises under the policy.

For this to happen, insurers should maintain adequate solvency margins and credible reinsurance arrangements. As an additional safeguard we can also think about a separate 'policyholders' protection fund'.

Strict enforcement is a must
By and large IRDA's solvency margin regulations are in consonance with those followed in most developed insurance markets. But given the volatility in financial markets, impinging on safety of investments and returns thereon, the huge accumulations of risks and catastrophic losses witnessed in the recent past, the 100-per cent solvency margin prescribed by IRDA may not be adequate unless it maintains a constant vigil over the insurers.

In many markets, a general insurance company is considered sound if the solvency margin ratio is 200 per cent or more. If the ratio is less than 200 per cent, the regulations insist on submission of the business improvement plan.

A solvency margin of about or less than 100 per cent — as it is in India — is considered to be rather dangerous, requiring very close monitoring and stringent actions including prohibition on payment of dividends, remuneration to the directors, restrictions on business operations, expenses of management and several such other measures.

The recent failures and bankruptcy of the insurers in developed markets like the US, Japan and the UK despite stringent solvency margin requirements offer quite a few lessons to be learnt by the emerging markets like India.

Given the just-adequate solvency margin position, it is imperative on the part of IRDA to have an early warning and efficient monitoring system to enforce the compliance of the regulations.