The Hindu Business Line : Solvency margin: Pvt insurers feel the pinch

If a company collects Rs 20 as premium and provides an insurance cover for Rs 100, the risk element is Rs 80. The solvency margin is calculated on Rs 80.

Mumbai , May 15

PRIVATE life insurance companies fear that the 150 per cent solvency margin stipulated by IRDA (Insurance Regulatory and Development Authority) is quite hefty and it may affect their growth.

According to them, IRDA norms will affect companies which have lower capital base and those offering conventional products. The delay in hiking FDI in insurance may also add to the problem as Indian promoters will find it difficult to raise more capital to meet the norms.

Solvency margin, in simple terms, means the excess of assets an insurance company is required to maintain over its liabilities. Like capital adequacy ratio in banks, solvency margin is part of the prudential norms. To satisfy the solvency margins, insurers have to build up reserve as their business grows.

For example, if a company collects Rs 20 as premium and provides an insurance cover for Rs 100, the risk element is Rs 80. The solvency margin is calculated on Rs 80.

LIC was the first one to protest the IRDA norms, but it subsequently made provision as per IRDA norms.

The contention of private insurance companies is that they require more unencumbered capital to write new business especially if their business deals with pure protection products rather than unit-linked products as more capital has to be stashed away in the case of the former because of the higher risk attached to it.

"Solvency margin at 110 or 115 per cent is understandable but 150 per cent is hefty," said Mr S. Krishnamurthy, MD and CEO, SBI Life Insurance.

" In ULIPs (unit-linked insurance plans) the risk is transferred to the policy holder. But since we offer protection-based products, we require higher capital. As private players are new entrants there are so many start-up costs," said Mr Krishnamurthy.

While some companies have been maintaining balanced portfolios in the kind of products they sell, others get majority of their business from a single kind of product. ICICI Prudential has about 80 per cent of its business coming from unit-linked products, while SBI Life has 50-60 per cent of its business coming from group insurance.

Mr Venkatesh Mysore, Managing Director, Met Life India, said, "For group term business the solvency requirement is 1 per cent of reserves plus 0.2 per cent of sum at risk. Since group term business is pure protection business, the sum at risk tends to be very large and maintaining 0.2 per cent of the sum at risk can be very onerous." Met Life ranks third in the group business portfolio and has a capital base of Rs 235 crore with the recent infusion of Rs 75 crore.

In the case of ULIPs, the risk is transferred to the policy holder. In the case of term policies since there is no maturity benefit, the risk tends to be lower. With money back and endowment plans, the risk to be borne by the company is much higher.

The argument is that the stipulated capital requirement has no linkage to the risk characteristics of the group. The requirement can be eased, say private insurers, if the capital is linked to factors such as the level of mortality risk applicable to the group. Ms Shikha Sharma, MD, ICICI Prudential, said without an understanding of what kind of business the company is writing and what kind of assets it is investing in, it is difficult to say whether the reserve is adequate or inadequate. "The current solvency margin is higher than that is needed to support the kind of business we are writing. The only way of bringing more players on an even platform is to move to a risk-weighted capital," she said.

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