Insurance regulator IRDA today proposed to bring down solvency margin requirement to 145 per cent against the existing norm of 150 per cent from next fiscal subject to adequate provision for risky investments.
Solvency margin is an indicator of claim settlement capability of insurers.
"After the implementation of above risk charge, solvency margin instead of being at 150 per cent shall be set at 145 per cent. The said requirement shall be applicable from financial year 2013-14," Insurance and Regulatory Development Authority (IRDA) said in an exposure draft.
The draft which is for both life and non-life insurance companies, has proposed to set aside a portion of capital if they invest the premium amount in more risky instrument other than government securities.
"The immediate need is felt to define the risk charge on the debt instruments and loans and advances of the insurers to address the spread risk on various categories of debt instruments," it said.
The capital provision for investment in 'AAA' and 'AA' rated bonds would be 0.9 per cent and 1.1 per cent respectively of the total capital charge, it said.
For 'A' and 'BBB' rated bonds it will be 1.4 per cent and 2.5 per cent while for 'BB' and unrated securities the provisioning would be 7.5 per cent.
The provisioning will help insurance companies to cover up losses in case of default of such risky instruments and maintain the financial health of the company for claim settlement.
As per the IRDA investment regulations, insurers need to invest majority of funds in government securities and approved investment instruments. However, there is no risk charge or provisioning at present for those who invest in more risky instruments.
The regulator has asked all the insurance firms to submit their comments on the exposure draft in the next 30 days.