The insurance regulator, IRDAI, should formulate a strategy, plan, and timetable for the modernisation of the solvency framework as soon as possible, and move to a more risk-based framework for supervision, says the International Monetary Fund in a technical note on insurance sector regulation and supervision in India.
The note, which is part of the IMF's 2017 Financial Sector Assessment Programme (FSAP) for India, lists these moves as of high priority.
The IMF also says that IRDAI should have regard to the expected new IFRS 17 on insurance liabilities (as an input into solvency valuation requirements) and to the well-advanced new International Association of Insurance Supervisors (IAIS) Insurance Capital Standards, adapted and recalibrated as necessary for application to the Indian market. Alternatively, IRDAI could draw on established approaches in other Asian countries (i.e., Singapore).
Given the nature of the market and complexity of an internal model option, IRDAI should implement only a standardised approach to risk-based capital, covering all risks, and require insurers to develop an Own Risk and Solvency Assessment. Time should be taken to calibrate the approach appropriately.
IRDAI should also move to a more risk-based framework for supervision. Onsite inspections in particular are compliance-based, and there is scope for more evaluation of the risks inherent in an insurer’s strategy, business model, and operations, and the adequacy of governance and controls in relation to those risks. A more risk-based supervisory approach would complement risk-based capital and encourage better risk management. IRDAI could develop a risk-based supervisory cycle, using impact and risk assessment to determine supervisory focus. Some commonality of approach with other Indian supervisors could support the further development of conglomerate supervision.
The note points out that IRDAI has not yet comprehensively updated its solvency requirements although a more formal approach to solvency control levels and new forms of eligible capital have been introduced. Implementation of International Financial Reporting Standards (IFRS) from financial year 2020–21 will require a move toward economic valuation for financial statements. IRDAI is now working with the industry on plans for economic valuation for solvency purposes and risk-based capital. India is an outlier—both in Asia and internationally—in not having moved in this direction as yet. Investment regulations remain conservative, but there are also unusual minimum requirements on investment in infrastructure and the housing sector. The insurance resolution framework appears comprehensive, though untested.
IRDAI should review its resources and organisation to meet the demands of a more risk-based approach. Current resources are inadequate to support IRDAI’s target onsite work programme. Moving to a more risk-based approach could release some resources as well as impose new demands on skills and expertise. IRDAI should review its current reliance on staff on deputation from public sector insurers as well as its current organisational structure.
Other changes recommended
The government and IRDAI should review the infrastructure and housing sector minimum investment requirements applying to insurers to ensure that they do not conflict with IRDAI’s regulatory objectives. IRDAI and the government of India should continue with their current reforms of the motor insurance market. IRDAI and, as necessary, the government, should consider further measures to level the playing field for insurers in the limited areas where there are, or may be perceived to be, advantages for public sector insurers. IRDAI should review aspects of its cross-border supervision, including its approach to the Indian insurers with significant foreign operations.