IMF Issues Technical Note on Insurance Sector Regulation in India

The staff finds that most of the 2011 FSAP recommendations on insurance regulation have been addressed. Issues with the independence of Insurance Regulatory and Development Authority of India (IRDAI) and overly informal approach in some areas, including solvency control levels and the arrangements for cooperation with other regulatory bodies, have been resolved. Public and private insurers are now subject to the same regulation, although there remain some structural advantages for the public-sector life insurers and reinsurers. Revisions to the key insurance law have transferred powers from government to IRDAI, including wider powers to issue regulations. Key recommendations of the 2017 FSAP include the following:

• Formulate a strategy, plan, and timetable for modernization of the solvency framework
• Consider the expected new IFRS 17 on insurance liabilities (as an input into solvency valuation requirements) and the well-advanced new IAIS Insurance Capital Standards to be adapted and recalibrated as necessary for application to the Indian market, or IRDAI could draw on established approaches in other Asian countries (that is, Singapore)
• Implement only a standardized approach (as internal models are a complex option) to risk-based capital, covering all risks, and require insurers to develop an Own Risk and Solvency Assessment  
• Move to a more risk-based framework for supervision, which would complement risk-based capital and encourage better risk management
• Consider further measures to level the playing field for insurers in the limited areas where there are, or may be perceived to be, advantages for public sector insurers

IRDAI is working with the industry on plans for economic valuation for solvency purposes and risk-based capital. India is an outlier—both in Asia and internationally—in not having moved in this direction so far. The insurance resolution framework appears comprehensive, though untested. IRDAI has decided, in the light of issuance of a final IFRS on insurance liabilities in May 2017 (IFRS 17, due to take effect in January 2021), to defer implementation of Ind AS to coincide with IFRS 17 implementation. Implementation of IFRS from financial year 2020–21 will require a move toward economic valuation for financial statements. IRDAI is monitoring the impact of Ind AS via private reporting. In discussion, insurers noted that the most significant impact of Ind AS would come through IFRS 17.

The overall insurance penetration in the country remains relatively low and public-sector insurers continue to command a majority of the market. Life insurance predominates, with about 75% of total premiums. Non-life insurance is dominated by motor insurance. Penetration rates remain unchanged from 2011 and are generally lower than in comparator countries, especially in non-life. While traditional sale channels continue to predominate, there is an increasing diversity in distribution. Risks in life insurance are relatively well-spread and in non-life are mainly short-term. The sector is profitable and solvency exceeds minimum requirements, but with exceptions.

Related Link: Technical Note on Insurance Sector

Keywords: Asia Pacific, India, Insurance, FSAP, Solvency II, IFRS 17, ICS, IRDAI, IMF