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After a one-year reprieve, the Insurance Regulatory and Development Authority (Irda) has tightened solvency norms for insurance companies beginning this year itself. Irda chairman J Hari Narayan said, "We are very clear about tightening capital guidelines. All the insurers will have to comply with a solvency margin of 150 per cent."
For the financial year 2010-11, Irda had relaxed the norms to 130 per cent. Solvency ratio pertains to capital and value of assets that insurers have to maintain over their insured liabilities. The ratios would have to be gradually raised and the process would start from this year itself, he added.
Hari Narayan made it clear and said, "The relaxation is an only one-time reprieve. It cannot continue forever." The regulator's firm stance implied that insurers would have to reach the enhanced solvency ratio effective from this year. Under the guidelines, the insurers would have to raise solvency ratio to 137 per cent this year, 145 per cent the following year and 150 per cent by third year.
Solvency, however, was not a major issue with public sector insurers, top PSU officials said. Life Insurance Corporation of India, New India Assurance Company, United India Insurance Company and National Insurance Company maintain solvency ratios of over two times their insured liabilities. However, for Oriental Insurance Company (OICL), solvency was an issue after the insurer made large provisions on its motor third-party insurance pool liabilities. OICL officials said that they were asked to make a provision of Rs 350 crore, resulting in shrinking the solvency ratio of the insurer to just 134 per cent.
For private sector insurance companies, the enhanced ratios mean that they would have to bring in additional capital to buffer the solvency margins, particularly the general insurance companies. Pawan Aggarwal, director of rating at Crisil, an independent rating agency, said, "Depending on the regulatory requirements and business plan, the companies will have to bring in additional capital."
Insurers that had fallen short of solvency ratios included Reliance General Insurance. Reliance General Insurance's solvency ratio was only 1.15 times the insured liabilities. This was despite the high recourse to the reinsurance market, according to its annual report for the last financial year.
For life insurers in the private sector, the tight solvency regime has prompted them to push only Ulips with an add-on term insurance plan, where the investment risk was entirely on policyholders. Ulips account for almost 80 per cent of the portfolios of private sector life insurers.
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