IRDAI to move to risk-based supervision of insurers

Framework to focus on risks entities pose to themselves

Insurance Regulatory and Development Authority of India (IRDAI) has decided to move to a risk-based supervisory (RBS) framework, from a compliance-based approach, a switch that will enable it to focus more on entities posing higher risks.

Announcing the decision and also explaining the reasons behind the move, the IRDAI on Thursday said under the existing compliance approach, the same yardstick was applied to all the regulated entities whereas under the RBS framework, each entity is to assessed based on its risk profile.

In doing so, the regulator would also be able to use its resources efficiently and achieve effective supervision. The framework proposed would consider various risks the insurers pose to themselves and the financial system at large.

“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,” a communication from the regulator to insurers said. Stating this, IRDAI said the risk-based supervision would be rolled out in a phased manner, starting with insurers and intermediaries after “running a pilot project on select entities to test the efficacy and efficiency of the implementation and to identity possible gaps.”

The regulator said it had formed an implementation committee to suggest the approach for the RBS and to achieve smooth transition. It advised insurers and intermediaries to initiate steps to lay greater focus on identification and assessment of risk of each activity they undertake.

The RBS roll-out would require the regulated entities to have “well defined standards of governance and well documented policies, procedures and practices in place to outline the responsibilities and accountability, more clearly.” They would need to review the risk management culture, adopt risk-based internal audit and put in place compliance units to take prompt corrective action.

Among the benefits of RBS framework, the regulator counted a structured approach to help assess various risks, both internal to entity and external environment.

IRDAI had earlier this year, declared its intent to shift to a risk-based capital framework for the insurance sector from the solvency capital regime. Under an RBC regime, the insurer’s minimum capital requirement is based on the risks to which they are exposed.