Risk-Based Supervision for Life Insurance Companies in India
IRDAI is looking to adopt a new risk assessment framework called Risk-Based Supervision (RBS). In a nutshell, the new Risk-Based Supervision framework:
- Is risk-focused, as opposed to compliance-focused existing framework.
- Is principles-based, as opposed to rules-based existing framework.
- Is forward-looking and focused on outcomes.
- Assesses risks emanating from within the insurer, as well as from outside, including the business environment.
How to implement RBS framework?
Designate a Supervisory Manager (SM), who will act as a single point of contact between the regulator and the insurer. SM will draft a Supervisory Action Plan and update it annually. SM will take the following steps:
- Identify significant business activities as per criteria of materiality (as per revenue, income, capital allocation, reserves, strategic, etc.)
- Identify inherent risks in conducting such significant business activities. For example, a large proportion of non-linked annuities may expose the insurer to large investment risks.
- Assign a level of risk (rating) to each significant business activity.
- Document appropriate measures and policies for control and mitigation of such inherent risks.
Working Example
Let’s understand by example. Assume that IndiaLife is a life insurer with a significant business volume in both annuities and life insurance.
The significant business activities of IndiaLife will be
- Investment Management
- R&D: Designing new policies and features.
- Managing existing policy features and rates.
- Underwriting and Claims Management.
- Marketing and Selling annuities and life insurance policies
- Customer Service and Retention
- Policy Data Management – IT and MIS
The inherent risks in the significant activities, as per impact/magnitude may include:
- Investment Risk
- Distribution Risk
- Interest Rate Risk (Lapse and Disintermediation Risk)
- Liquidity / Cash Management
- Mortality and Longevity Risks
- Risk to Marketing and Brand Value
- Risks to Operations and Business Continuity
- Customer Service and Claims Management
- Credit Rating, Litigation, etc.
Based on the inherent risks identified, the Supervisory Manager will then deliver the following outcomes.
- Document various control measures for the risks listed above.
- Document appropriate risk appetite and risk limits, and capital cushion.
- Assess the quality of oversight/control for each inherent risk.
- Assign a risk rating (low/moderate/substantial) for each inherent risk.
- Assign forward-looking guidance with respect to the level of risk (stable/decreasing/increasing).
- Prescribe a level of oversight (low/enhanced/intensive oversight), or intervention, if necessary.
- Insurers are in the business of taking risk. Insurers that have high inherent risk and high-quality controls are more successful than insurers with low inherent risks and poor controls. At Annuity Risk, we think that RBS will become an effective measure in nudging insurers towards a higher scale and ensuing higher profitability, by bolstering their risk assessment and management practices.
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Copyright © 2023 Annuity Risk India Pvt. Ltd.