IRDAI to migrate to Risk Based Supervision of Insurers
Insurance Regulatory and Development Authority of India (IRDAI) has announced its plan to move from Compliance Based Approach to Risk Based Supervisory (RBS) framework of insurance entities. Compared to compliance based approach, risk based supervision will enable IRDAI to focuses more on the risk associated with each insurer and identify the insurance companies carrying higher risks.
The main reasoning given by IRDAI for the move is that under the prevailing compliance approach, a common yard stick is being applied to all the entities under scrutiny. Under the proposed RBS model, IRDAI can assess each entity based on its risk profile. In effect, it is a move from a history based audit to measure of preparedness to deal with the unfolding uncertainty in future. RBS puts emphasis on risk based internal audit reports rather than on the controls based reports. To achieve this, IRDAI must put in place a robust offsite surveillance system.
IRDAI has informed the insurers that risk based supervision would be rolled out in a phased manner. It intends to bring all entities under RBS after “running a pilot project on select entities to test the efficacy and efficiency of the implementation and to identity possible gaps.” Rolling out RBS in phased manner was adopted by RBI too for banks when the regulator of banks shifted towards RBS.
A communication from IRDAI to insurers stated, “the risk profile of each entity would determine the supervisory action plan comprising off-site monitoring, on-site inspections and structured meeting with the entities in conjunction with specific supervisory action plan.”
An implementation committee has already been formed by IRDAI to create a roadmap for smooth transition towards RBS. Meanwhile, it has advised insurers and other related entities to form strategies to identify and assess risk associated with each activity undertaken by them.
The move of IRDAI is a positive one as RBS emphasizes on corporate governance, well defined policies, documented procedures and practices that clearly outline the responsibilities and accountability. A risk based approach will enable the regulated entities to prepare themselves for the uncertainties in markets and adopt the best practices followed in developed countries. As a result, insurers would be compelled to assess various risks originating inside the entity and that emanating from external environment.
IRDAI had earlier announced its decision to migrate from the solvency capital regime to a risk based capital structure wherein the insurer’s minimum capital requirement is based on the risks undertaken by them.
