Risk-Based Capital Regime for Healthy Growth of the Insurance Industry

Abstract

A ship is safe in the harbour, but that's not what ships are made for
As the Indian Insurance sector enters the third decade since the regulation of the insurance market, we are still young to realize the impact of solvency. At present, the
insurance industry is following the constant factor-based solvency-margin organization model, there is a need to debate whether this formula applies even today,
as the risks carried have evolved exponentially. The factor-based model is tantamount to painting everything with the same brush and with the same colour as well.

As the industry is still in its nascent stage, we may not have seen any company getting insolvent or nearing the red line, but the aim of this article is to make the reader realize the importance of solvency for the sector and so it is necessary to brainstorm on the effective methods to monitor and prevent such an eventuality. The web of interlinks between the insurance sector and the economy is also showcased to display how its stability is critical for the Indian economy.

Effectively, there are many models being implemented across the mature, as well as developing markets, and each model has its own merits and demerits. Comparative models are being implemented by various countries and their experiences vis-à-vis the Indian models are being evaluated. Currently, India has realized that there is no need for major black-swan events or loaded rockets to test the models, but a microbial virus could significantly erode our capital and test our models effectively! The question is – Are we prepared enough?

Eventually, the article tries to convince the reader that there is a lot of scope in this sector and an effective movement from the factor-based model to a Specialized Risk Based Solvency Model (SRBS) will help bring much more maturity to the market along with the stability, it promises to its customers – come what may!