What Will Be On The Agenda Of Next IRDAI Chairman

Half-a-dozen state-run and private insurers went public and overseas reinsurers set up branches during the term of former insurance regulatory chief T S Vijayan that ended on Feb. 20. The period of transition is far from over.

Insurance penetration is still low in Asia’s third-largest economy and the industry awaits new norms for reinsurance and is also moving to the latest accounting standards. The new head of Insurance Regulatory and Development Authority of India—the interviews were scheduled for today—will have to navigate this and more.

The Indian insurance industry is growing rapidly and although the road ahead looks bright, it will be laden with more responsibilities for the new chairman, said Santosh Singh, head of research and financial services at brokerage Haitong Securities. “The new IRDAI chief will not just have to keep up the pace of growth, but also protect the interest of policyholders through effective regulatory practices,”

Here's what awaits the new head of India’s insurance regulatory body.

Preference To GIC In Reinsurance

The General Insurance Corporation of India gets the first right on reinsurance business. There has been a demand to revise the order of preference. The draft regulations put out by the regulator on Jan. 5, GIC Re retains the first right of refusal, followed by other Indian reinsurers and foreign reinsurance branches. Since there is no large Indian reinsurer other than GIC, the draft rules effectively give second preference to local branches of overseas insurers over those with no operations in India.

The new rules would come out after yet another round of discussion in the next board meeting, Vijayan had told BloombergQuint earlier.

“The new chairman has to ensure that foreign reinsurance branches along with the Indian reinsurers are regulated on a par with the international market standards,” said R Chandrasekaran, secretary general of the General Insurance Council. “More focus on matching regulatory expertise with global standards will improve the ease of doing insurance business in India.”

Risk-Based Capital

In India, the solvency norms require insurers to maintain funds equivalent to 1.5 times their liabilities irrespective of size and profile. Globally, risk-based capital approach is followed where statutory buffers are based on the risk of each company. The risk-based approach assigns risk weights to different asset classes based on the company’s product portfolio, size and profile.

The current method does not have any link between the required solvency margin and the risks associated with the business and the chances of early identification of risks are low, a July 2017 report by an IRDAI committee said. The new approach, according to the report, will increase the efficiency of capital allocation by allowing a lower solvency margin for insurers with better risk management practices.

New Accounting Standards

Implementation of Indian Accounting Standards (Ind AS) will be another priority. The rollout was deferred to April 2020 by because of a disparity with global norms. Under the India Account Standard 39, insurers would value assets based on market price but continue with the existing formula-based valuation approach for liabilities.

That would not just cause volatility in the financial statements of insurance companies but also increase their compliance costs—first when Ind AS is implemented and later when International Financial Reporting Standard 17 becomes globally applicable from January 2021, IRDAI said in a June circular.

The regulator decided to transition to the Ind AS standard of IFRS 17 by April 2019 and implement it by April 2020 before the international deadline.

“The implementation of risk-based solvency approach would merge with IndAS adoption,” Vijayan had told BloombergQuint. “Both of these will happen around the same time by 2020.”

Chandrasekaran said that would be the biggest challenge for the next chairman.

Digital Disruption

The Insurance Information Bureau of India and insurance repositories need to be strengthened to gather and analyse data, which should be shared with the industry, said V Manickam, secretary general of Life Insurance Council. “The industry needs to interact actively with technology to bring transparency, increase awareness and improve the performance of insurance companies.”

The industry also faces digital disruptions such blockchain technology, use of automated chatbots, online sale and price comparison, digitised claim settlements and integration of financial technology platforms. “Effective regulations led by a deeper understanding of technology will push further growth and reduce frauds,” said Manickam.

Increasing Insurance Penetration

Insurance penetration in India is 3.5 percent of its GDP compared with the global average of 6.28 percent, according to a report by global reinsurer Swiss Re.

“Prime Minister’s Jeevan Jyoti Bima Yojana should be made available to all people and not just bank account holders to increase the penetration of life insurance in the country,” said Manickam. Simpler products with focus on the rural sector along with the existing government schemes will pave way for increasing the reach of insurance in India, he said.

Chandrasekaran said the regulator needs to work on developing the market through specialised products such as cyber, credit and liability insurance.