Life firms ask regulator to allow risk-based solvency regime for ULIPs

Life insurance companies will raise their solvency margin and free up capital that can be used for other purposes

Some life insurance companies plan to move the Insurance Regulatory and Development Authority (Irdai), seeking a risk-based solvency regime for unit-linked insurance plans (ULIPs), where the risk is borne by policyholders.

If the regulator gives its nod to this proposal, the capital blocked for ULIPs will come down. This will boost the solvency margins of insurers and release capital for other purposes.

Currently, the insurers follow a rule-based solvency regime. As a result, insurers’ assets are required to be 1.5 times, or 150 per cent, of their liabilities. The minimum solvency ratio that insurance companies must maintain is 1.5 in order to lower risks.

In terms of solvency margin, the required value is 150 per cent.

Solvency margin is the extra capital companies must hold over and above the claim amounts they are likely to incur. It acts as a financial back-up in extreme situations, enabling the company to settle all claims.

Once a risk-based solvency regime is implemented, insurance companies will have to hold capital in proportion of the business they write. Riskier the business, higher is the capital requirement.

Vighnesh Shahane, managing director (MD) and chief executive officer (CEO), Ageas Federal Life Insurance, said, “What we have suggested is that risk-based solvency can be started off with unit-linked plans. This is because in ULIPs the risk is borne by the policyholders. So, the capital required to be blocked for ULIP products will come down. As a result, the solvency margin of insurance companies will improve and the capital released can be used for other purposes.”

Under the current solvency regime, though capital requirements for ULIPs are similar like any other product, the profit under this segment is less due to cap on charges.

Back in 2011, the regulator put a cap on charges that can be levied on ULIPs. This was done to make them more customer friendly.

Hence, the profit of insurance companies took a beating but the blocking of capital remained the same. The risk-based solvency regime will address this issue by allocating lower capital to the ULIP segment, people in the know said.

Life insurance companies are planning to place this demand with the Life Insurance Council. And, through the council, it will be taken up with the insurance regulator.

Emails sent to the council and the insurance regulator did not elicit any response till the time of going to press. Irdai has been talking of introducing risk-based solvency for a long time now.

Former head of Irdai Shubash Chandra Khuntia had, on multiple occasions, expressed his intentions to introduce a risk-based solvency regime for the insurance sector.

In 2020, Khuntia had said at a Confederation of Indian Industry (CII) meet that, “Risk-based solvency or capital adequacy system will be introduced. We are working on it and we should do it in about three years.”