Get complete information on the Risk Management in General Insurance
Solvency Margin Formula :
IRDA’s relevant regulations prescribe required solvency margin (RSM) at 20% of the net premiums or 30% of net increased claims whichever in higher.
Risk Based Capital :
Risk Based Capital (RBC) formula comprises asset risk, credit risk, underwriting loss, underwriting premium risk and off balance sheet risk.
The importance of proper reserving cannot be over-emphasised. The failure to provide adequately for future claims is attributed to ‘under reserving’ or ‘under provisioning’.
Reserves can be classified as unearned premium reserves (UPR), Unexpired Risk Reserve (URR) outstanding Claims Reserve (OCR), Chain Ladder Method (CL), Average Cost Per Claim Method (ACPC) and Incurred but not reported Reserve (IBNR).
Alternate Risk Management :
These are several alternate risk management strategies such as risk transfer (reinsurance), risk hedging through interest ratio etc. longevity bonds and managing financial market risks.
Solvency 1 is based on minimum solvency standards. The solvency directive adopted in 2002 left the solvency calculation unchanged but only adjusted some other components. Solvency requirements should be fulfilled at all times rather than only at the time the financial statements are drawn up.
All life insurers are required to Gold capital of at least the Solvency 1 minimum guarantee fund, or the Solvency required solvency margin plus the resilience capital requirement. Solvency capital requirement will be calculation by applying either the standard approach or the insurer’s won internal risk model.
Solvency I require insurers to hold capital funds equal to the required solvency margin or the minimum guarantee fund, whichever is the higher. Solvency for non-life insurance is defined as the higher of the premium and the claim index.
Premium Index = 18% of gross premium x retention rate
Claims Index = 26% of gross claim x retention rate
Retention Net claims -r Gross claims (3 year average but not less than 50%)
Solvency I for Life Insurance is Required Solvency Margin
4% x gross mathematical provision x retention rate mathematical provision + 3% x capital at risk x retention rate capital at risk.
Solvency II :
Solvency II requires adequate capital backing for the volatility of claims. The assess which lives of business may exhibit above-average volatility the loss rations of five non-life lives of business.
European Union (EU) adopted solvency I 2002 which was converted to solvency II in early 2003. EU commission is expected to adopt the solvency II directive in mid 2007. After its adoption by EU Parliament and the council of Ministers, the implementation is scheduled to be complete by 2010.
One of the objectives of Solvency II is to establish a solvency capital requirement which is better matched to the risks of an insurance company. The characteristic of solvency II are based on principles and not rules.
These are two levels of capital requirements under solvency II, i.e. The Minimum Capital Requirement (MCR) and Solvency Capital Requirement. MCR is the minimum level below which ultimate supervisory action will be triggered.
SCR should deliver a level of capital that enables an insurance undertaking to absolute significant unforeseen losses and gives reasonable assurance to policy holders that payment will be made as they fall due.
Solvency II deals with quantitative requirements, supervisory review powers and for insurer’s internal control and risk management and disclosure and transparency to reinforce market mechanism and risk based supervisors. It reinforces on risk/return fundamentals.
IRDA Role :
The reporting framework for published accounts for insurance companies in prescribed by the IRDA and is mainly armed at demonstrating solvency and protecting the interest of policy holders.
The IRDA reviews the functioning of the insurance company, from time to time, through inspections meetings with the CEO, CFO, the Appointed Actuary and other senior officials to form a view of compliance and how risk issuer are addressed by the company. The solvency requirements are related to mathematical reserves and sum at risk reflecting solvency I.
The insurers are required to maintain, at all times, solvency margin at not less than 150% of the required level as per the regulators. As of now, the regulations allow only equity as the accepted form of capital.
Solvency framework in India is similar to some of the Asian countries which follow Solvency I. Although there is a move towards a risk based capital which is principles based and focuses on the specific risks to which the business is exposed.
The IRDA is a number of International Association of Insurance Supervisors (IAIS) which is working towards a common structure and common standards for assessing insurer solvency as a new framework for insurance supervision. The risks faced by an insurer have been categorised under five heads viz., underwriting risk, credit risk, market risk, operational risk and liquidity risk.
De-tariffing has provided significant opportunities in tapping more markets and will provide even more opportunities after product liberalisation. It has placed the onus of correct pricing on the players themselves.
While this has resulted in players preparing to identify risk parameters and pricing products based on risks, the immediate response has been to drop the rates in hitherto non-profitable business. The price war wills erase capital. The general insurances players are exposed to memories such risks as financial and non-financial.
Financial risks include capital risks asset liability management risks insurance risks and credit risks. Capital risks relates to capital structure risks and capital adequacy risks. Asset Liability Management Risks takes into consideration of exchange rate risks, interest rate risks and investment management risks.
Insurance risks are underwriting risks, catastrophic risks, reserves risks, pricing risks and claim and management risks. Credit risks include re-insurer’s risks, policy holder premium, brokers, claim recoveries and other debtors.
Non Financial Risks are enterprise risks and operational risks. Enterprise risks include reputation risks parent’s risks and competitor behavior risks.
Operational risks are regulators risks, business continuity risk, IT obsolescence risks, people and process risks, risks of frauds process-related risks regulatory compliance risks and outsourcing related risks.
Trained and devoted personnel as well as agents can manage these risks effectively. The impact of detariffing was realised by discounting the rates endlessly. It creates problems to them.
So, they were given freedom in Policy wording. IRDA issued guidelines for relation in terms and Relaxations in Detariffing condition.
Insurers are permitted to file Add.-on. Covers over and above the erstwhile tariff covers in Fire, Engineering, Industrial All Risks and Motor insurance. Insurers are permitted to file variations in deductible from those prescribed.
They are permitted to extend engineering insurance to movable and portable equipments As a result of detariffing, friendly policies are issued. The insured are paid claims without deducting depreciation.
The Add-on cover provides for payment of loan installment to the finances during the period of accident repairs. This cover provides for payment of incidental expenses, providing alternative vehicle, reimburse loss of personal items kept in the car.
Housebreaking risk can be covered as an extension to fire insurance of residential property, thereby avoiding the necessity of taking separate burglary cover.
Loss of or damage to the property insured caused by its own fermentation, natural heating or spontaneous combustion can be covered as an extension. Fire policy can be extended to cover jetties.
Hotel, holiday resorts and private properties erected on sea shore can be caused in fire policy itself.
Insurers have extended coverage to cover the loss or damage to boiler, ecouonnser, other vessel, apparatus or their contents resulting from their own explosion implosion. Accidental damage coverage is included under property insurance. Marine risk can be combined with storage risk.
Current Impact :
The abolition of the tariffs has lead to price war in Fire and Engineering insurance. This caused negative impact on commission because the cost is not sustainable. Many insurers are facing pressure on profitability the customers are in advantageous position as they can bargain better they can increase their insurance levels.
The tariff abolitions in international markets suggests that the market reacts with a sharp drop in the premium rates the followers may also reduce the rates and price-war may cause problems to industry. It has a major concern on the continued solvency of the insurance companies.