How IRDAI protects policyholders from crises at insurance companies
Insurers are required to follow certain investment norms, like they cannot invest in debt securities with a rating below AAA. If any asset is impaired and the rating falls below AAA, it has to be marked to market. The insurer cannot hide this.
Given the impact of crises at banks and non-banking financial companies (NBFCs) on individual depositors, any adverse news is bound to make policyholders anxious. “These segments require a long-term commitment. Policyholders are bound to be jittery when something happens to the company they have invested in for years. Non-life insurance is mostly an annual affair and thus exposure is limited,” says Jayesh Gadekar, Head, Health and Benefits, Global Insurance Brokers. However, the insurance regulator has adequate powers— and the system requisite checks and balances— to safeguard policyholders’ interests in case insurers run into trouble.
The Reliance Health Insurance case is a pointer to powers that Irdai is endowed with to protect policyholders’ interests. It initiated action after the year-old company’s failed to maintain the required solvency margin after June 2019.
Irdai stipulates that all insurers—life, health and general—maintain a minimum solvency ratio of 150%. Solvency margin, captured in this ratio, is the excess of assets over liabilities. “A number higher than the mandatory requirement bodes well for the financial strength of the insurer,” says Mahavir Chopra, Director, Health, Life and Strategic Initiatives, Coverfox.com. It leaves no room for concerns about the insurer going through a financial crisis. “Most Indian insurers today maintain this ratio at much higher levels of 180-220%,” says Ashwin B, COO, Exide Life Insurance.
Solvency ratio indicator of insurer health
Solvency ratio of most insurers is above the required limit of 150%.
Source: Irdai, General Insurance Council and company websites; data for top five life insurers by market share in Oct 2019 and top two PSU general insurers, private general insurers and standalone health insurer by premium collected in Oct 2019
However, this number should not be considered in isolation. “For example, the solvency ratio of Life Insurance Corporation of India (LIC) on 30 September was 1.60, but a low number doesn’t mean that LIC is facing a financial crunch. The ratio keeps changing quarterly, so the number can increase in subsequent quarters,” he adds.
In case of Reliance Health, the insurance regulator issued directions in August asking the company to rectify the deficiency in a month, but the insurer failed to comply. “Thereafter, the insurer was issued a show cause notice and given another opportunity to present its case. However, there has been no improvement but further deterioration in the financial position of RHICL,” the Irdai stated, explaining the rationale behind its action. In such cases, the regulator asks the insurer to propose a financial plan to dust off the crisis. More stringent action is considered only if the insurer fails to comply.
Rules of investment
Besides problems related to financials and governance issues, wrong investment decisions, too, could precipitate a crisis. To prevent such crises, insurers are required to follow certain investment norms. “For example, insurers cannot invest in debt securities with a rating below AAA. If any asset is impaired and the rating falls below AAA, it has to be marked to market. The insurer cannot hide the fact. Any MoM loss has to be borne by shareholders – the policyholders remain protected,” says Ashwin B.
Irdai to the rescue
One of the key objectives of setting up a regulatory authority was to ensure policyholder protection. “The regulator has wide ranging powers to take action if insurers fail to meet their solvency criteria. It keeps close tabs on the solvency levels as they determine the company’s ability to pay claims,” explains Satyendra Srivastava, Partner, Khaitan Legal Associates.
For instance, Section 52A of the Insurance Act, 1938 empowers the regulator to appoint an administrator for a life insurer if it feels that it is acting in a manner that is prejudicial to the interests of policyholders. “Under Section 52B, this administrator can transfer the business to another insurer or reccommend winding up of the business,” says an insurance lawyer who did not wish to be named. In 2017, Irdai followed this path and was instrumental in facilitating the acquisition of the troubled Sahara Life Insurance by ICICI Prudential Life Insurance. Governancerelated issues were at the heart of this decision by the regulator-appointed administrator. “On the filing of the report with the Irdai, the authority may take such action as he thinks fit for promoting the interests of the holders of life insurance policies in general,” the amended Insurance Act says.