The Insurance Regulator and Development Authority of India (Irdai) has named three public sector insurance companies — Life Insurance Corporation (LIC), General Insurance Corporation (GIC Re) and New India Assurance – as ‘too big or too important to fail’ (TBTF) institutions or Domestic Systemically Important Insurers (D-SIIs), which will require enhanced regulatory supervision and a higher level of corporate governance.
The regulator’s move has come ahead of the government plan to list the shares of LIC — India’s largest financial entity with assets of Rs 32 lakh crore — on the stock exchanges through an initial public offering (IPO) next year. GIC Re and New India are already listed on the exchanges.
LIC’s gross total income grew to Rs 615,882.94 crore for the year ended March 2020 from Rs 560,784.39 crore, showing a growth of over 9.83 per cent. GIC Re is the largest reinsurance company – or insurer’s insurer – with a gross premium income of Rs 51,030 crore. New India which is the largest general insurance company in the country had total global assets of Rs 74,609 crore as of March 2020. “Given the nature of their operations and the systemic importance of the D-SIIs, these insurers have been asked to raise the level of corporate governance and identify all relevant risk and promote a sound risk management culture,” IRDAI said.
Failure may bring distress
The insurance regulator said Domestic Systemically Important Insurers (D-SIIs) refer to insurers of such size, market importance and domestic and global inter connectedness whose distress or failure would cause a significant dislocation in the domestic financial system.
The Reserve Bank of India (RBI) had last year named State Bank of India (SBI), ICICI Bank and HDFC Bank as Domestic Systemically Important Banks (D-SIBs), which in other words mean banks that are too big to fail. As per the RBI norms, these banks will have to set aside more capital for their continued operation.
The insurance regulator said D-SIIs refer to insurers of such size, market importance and domestic and global inter connectedness whose distress or failure would cause a significant dislocation in the domestic financial system. “Therefore, the continued functioning of D-SIIs is critical for the uninterrupted availability of insurance services to the national economy. D-SIIs are perceived as insurers that are ‘too big or too important to fail’” it said.
This perception and the perceived expectation of government support may amplify risk taking, reduce market discipline, create competitive distortions, and increase the possibility of distress in future. These considerations require that D-SIIs should be subjected to additional regulatory measures to deal with the systemic risks and moral hazard issues, IRDAI said.
In order to identify such insurers and to put such insurers to enhanced monitoring mechanism, IRDAI developed a methodology for identification and supervision of D-SIIs. The parameters, as per the methodology for identification of D-SIIs include the size of operations in terms of total revenue, including premium underwritten and the value of assets under management, global activities across more than one jurisdiction, lack of substitutability of their products and/or operations and interconnectedness through counterparty exposure and macro-economic exposure.
“These parameters were assigned weights to cover various aspects of their operations. The Authority would identify D-SIIs on an annual basis and disclose the names of these insurers for public information,” it said.
“Given the nature of their operations and the systemic importance of the D-SIIs, these insurers have been asked to raise the level of corporate governance and identify all relevant risk and promote a sound risk management culture. D-SIIs will also be subjected to enhanced regulatory supervision,” IRDAI said.
“All the decisions regarding listing of LIC shares are taken by DIPAM, Ministry of Finance. During the last FY 2019-20, our market share as of March was 68.92 per cent and as of July 2020, the market share in FYPI (first year premium income) was 71.49 per cent which shows an increase of 257 basis points,” LIC MD Vipin Anand said in an interview recently.
GIC Re registered a net loss of Rs 359.09 crore in FY 2020 as compared to a net profit of Rs 2,224.31 crore in FY19 as it took a heavy beating in the December quarter. For the full year, the gross premium income grew 15.35 per cent to Rs 51,030.13 crore from Rs 44,238 crore in FY19. For the full fiscal, New India Assurance registered a net profit of Rs 1,417.75 crore in 2019-20 as against Rs 579.79 crore in the previous fiscal. Its total income in 2019-20 rose to Rs 28,046.56 crore from Rs 25,272.38 crore a year ago.
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