An enhanced regulatory framework for insurers who are systemically important for the insurance sector in the country is on the cards.
As a first step in this direction, the Insurance Regulatory and Development Authority of India (IRDAI) has constituted a committee that will not only facilitate in identifying the Systemically Important Insurers (SIIs), but also recommend enhanced supervision measures for them.
The insurance sector has grown exponentially in the last 15 years and a few of the insurers have a sizeable market share and interconnected with other financial institutions as well. Stating this, the order constituting the committee said that IRDAI was of the view that there was a need to identify such SIIs. The regulator also wants to put in place a system of enhanced regulatory framework for them.
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Setting the backdrop for the decision is the advisory of the International Association of Insurance Supervisors (IAIS) to all member countries to have a regulatory framework to deal with Dometic-SIIs. The association, in November 2015, had released a public consultation document that outlined proposed revisions to the previous (2013) methodology for globally SIIs. The next revision to the assessment methodology is effective this year.
SIIs, the regulator said in the order, are perceived as insurers that are Too Big To Fail (TBTF). Their failure has the potential to cause significant disruption to the essential services they provide to the policyholders and, in turn, to the overall economic activity of the country. Stating that continued functioning of the SIIs is critical, the perception that they are TBTF creates an expectation of government support for these insurers at the time of distress.
Due to this perception, these insurers enjoy certain advantages in the markets. However, the expectation of government support “amplifies risk taking, reduces market discipline, creates competitive distortions and increases the probability of distress in the future." Thus, the SIIs should be subjected too additional regulatory measures to deal with the systemic risks.
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IRDAI member (finance and investment) Pravin Kutumbe will chair the committee that will have six other senior officials as members, including one as convenor. The committee, which has been given six months to submit its report, would study the methodology followed by IAIS for identification of SIIs; those followed by other financial regulators, particularly by RBI for identification of SIFIs; develop a paper on assessment methodology for SIIs in India; and recommend enhanced supervision measures.