Tenders: FinMin for easing PSU insurers’ solvency criteria

The Ministry’s note follows the intense competition in the sector and the decline in the performance of three PSU insurers. Only New India Assurance Company Ltd has reported a solvency ratio of more than 1.5 among the four PSU insurers. Government departments and CPSEs, which constitute a big market for insurance companies, award insurance contracts through a tender process.

Solvency ratio – net income and depreciation divided by liabilities — is the financial capacity of an insurance company to meet its obligations. A high ratio means the company is financially sound and it has enough capital to pay all valid claims. As per the IRDAI’s mandate, the minimum solvency ratio that insurance companies must maintain is 1.5 to lower risks. In terms of solvency margin, the required value is 150 per cent.

The solvency margin is the extra capital the companies must hold over and above the claim amounts they are likely to incur. Private insurers are required to maintain 1.5 solvency ratio for participating in the tender process.

While solvency margin is a good measure to assess the financial health and stability and the ability of insurers to meet the liability, it is important to note that the insurance sector is duly regulated by Insurance Regulatory and Development Authority of India (IRDAI), the Ministry note said. IRDAI has allowed forbearance (from maintaining required solvency ratio) to these companies considering all aspects and allowed them to continue underwriting business as usual, it said.

It is pertinent to note that the reinsured liability is not factored into calculation of solvency ratio, specified by IRDAI, as a result of which solvency ratio of 1.5 is very high from a risk perspective, the Ministry said. Further, public sector general insurance companies have not defaulted ever on their liabilities. “The government has recently infused capital in the above-mentioned companies and stands committed to provide more capital, as may be required,” notification sent.

“It is requested not to include solvency ratio as a criterion for participation of public sector general insurance companies in general insurance tenders. This would enhance competition in the bidding process without compromising on the quality of services. It is also requested to bring this to the attention of all the procuring entities and organisations under the administrative jurisdiction of your Ministry/ Department,” the Ministry said.