The insurance industry would soon move to a risk-based capital requirement system from the current solvency margin based capital requirements norms.
“A clear roadmap for the risk-based capital norm will evolve by March 2009,” said R Kannan, member (Actuary) Insurance Regulatory Development Authority (IRDA), on Friday while speaking to the media.
Currently, insurance companies have to maintain solvency margin of 150 per cent of the amount underwritten, in cash, across all categories of products.
Risk based capital norm will lower the capital requirement for a company that is exposed to lower guarantee and risk against one that is exposed to higher guarantee and risk.
The industry has welcomed such a move.
“It is a welcome move and will differentiate between traditional and unit-linked products for capital requirement,” said P Nandgopal, chief executive officer, Reliance Life Insurance.
“There will be clear differentiation between each product line and the inherent guarantee along with defining the capital required to cover the liabilities.”
The new norms will mean that traditional products like term and endowment plans that have an inherent guarantee, will require larger capital. In case of unit-linked products (ULIPs), which have no guarantee, will have lesser capital requirement.
“This will free up capital for the Ulips since they have market linked returns and the investment risk is not of the company” said Nandgopal.