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Home / IRDA Update 

IRDA discloses new solvency margins

In its new regulations on solvency margins, assets, liabilities and deposits for insurers, the IRDA has asked life insurance companies including LIC to deposit a sum equivalent to 1 percent of the gross premium written in the country after the financial year ending March, 2000. General insurance companies including GIC and its four subsidiaries have been asked to deposit a sum equivalent 3 percent of their gross premium. Yet, the amount deposited by the insurance companies at any point of time will not exceed Rs.10 crores.

For a reinsurer like GIC and other possibly players, the IRDA has asked for a deposit for Rs.20 crores to be made either in cash or approved securities which would be estimated at the market value of the securities on the date of deposit. The deposit can also be made partly in cash and partly in approved securities.

The cash deposit must be made with the deposit accounts department of the RBI at New Delhi and will not carry any interest. Such deposits are not subject to any transfer and cannot be withdrawn by the insurer without the prior approval of the authority.

The insurance company has to deposit within 90 days of the close of the accounting year except in the case of the existing users who are permitted to make the deposit or shortfall within 60 days of the regulations coming into effect. Any breach of the provisions will result in the cancellation of the registration of the insurer.

Every insurer will furnish to the IRDA a statement of assets and liabilities held at the end of each closing financial year in respect of funds maintained by him along with the returns. The regulations of assets, liabilities and solvency margins of insurers will be governed by the Insurance Act, 1938 and the assets will have to be valued in accordance with the regulation of statement of accounts as defined in the IRDA Act, 1939.

The IRDA has propounded that approved securities, investments and deposits are those investments as defined by the Insurance Act, 1938. Among the non-mandated Investments for the insurance companies, the IRDA has approved corporate bonds rated and non-rated, preference shares, listed preferred shares, unlisted preferred shares, equity, listed ordinary shares, unlisted ordinary shares along with investments in mortgages, residential and commercial real estate.

About the systems of reporting, the IRDA has stipulated that an appointed actuary or auditor's quarterly report must give details of the new products, new investments, reinsurance and other financial activities of the insurer for each of the quarters within the financial year before 30 days from the end of the quarter.

About mortality, the regulatory document says the mortality rates to be used should be expressed as a percentage of the published table, unless the insurer has constructed a separate table based on its own experience. A penalty of Rs.5 lakhs will be slapped against any company if it furnishes false information.

According to the IRDA, the rates of interest to be used in calculating the present value of future payments by or to an insurer shall be no greater than the rates of interest determined from the prudent assessment of the yields from the existing assets attributable to life insurance business and to the extent appropriate to the yields which it is expected will be obtained from the sums invested in the future.

Also, a policy may have built-in options that may be exercised by the policyholder such as conversion or addition of coverage at future dates, without any evidences of good health, annuity rate guarantees at maturity of contract. The cost of such options will be estimated and treated as special cash flow in calculating the liability.

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