Regulator bars insurers from capital gearing treaties

The IRDAI has warned insurers against entering into fresh capital gearing treaties, and to phase out existing treaties.

The regulator says that it has observed that some insurers have entered into such arrangements in various forms including Quota Share Reinsurance Treaty.

In a circular dated 28 March, addressed to general insurers, health insurers and specialised insurers, the the regulator said, “The terms of these treaties have been examined, and the Authority is of the considered view that such capital gearing treaties are of the nature of financial arrangements and not primarily a risk transfer mechanism. It appears that insurers have adopted these arrangements in order to improve the solvency margin ratio.”

The IRDAI thus directs the insurers to adhere to the following:

a. no insurer shall enter into any fresh capital gearing treaties effective from the date of issuance of the circular (28 March); and

b. Insurers which have such treaties on their books as on the date of issuance of the circular shall take the following steps:

1. Submit Board approved action plan to the Authority by 30 June 2020 for phasing out the treaties along with timelines such that there is compliance with solvency stipulations. The plan of action shall also include an assessment of any requirement for capital infusion and sources of funds for the capital infusion where required due to prospective closure of these capital gearing treaties.
2. the direct insurers (cedents) shall create appropriate reserves towards Unearned Premium Reserves, Premium Deficiency Reserves, Outstanding Claims Reserves (including IBNR/IBNER) in accordance with IRDAI regulations. Further, such treaties have to be accounted for in their financial statements, based on the principle of “Substance over Form”.

Source: Asia Insurance Review