Non-life insurance cos: SECP suggests ways to determine risk capital charge

ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) has proposed that the insurance risk capital charge for non-life insurance companies should be determined for premium liability risk and claim liability separately.

The SECP’s document on new measures to improve the performance of the insurance sector revealed that based on SECP’s research of relevant capital regimes, it is proposed that the insurance risk capital charge for non-life companies be determined for premium liability risk and claim liability separately, using the factor-based model.

The premiums liability risk charges for each class of non-life insurance business is to be determined separately, by multiplying the net unexpired risk reserve (URR) determined at the proposed confidence interval (to be decided in the subsequent stages), by the corresponding premiums liability risk factor as prescribed.

Similarly, claims liability risk charges for each sub-class of general insurance business shall be determined separately, by multiplying the net claims liability by the corresponding claims liability risk factor as prescribed.

The SECP document further revealed that credit risk is the risk of losses resulting from asset defaults, related losses of income and the inability of the counterparty to fully meet its contractual financial obligations.

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Based on the review of the State Bank of Pakistan (SBP) Basel regime, it is proposed to calculate the risk charge for credit risk using the Standardized Approach (“SA”). Under SA, the capital requirement is based on the risk assessment credit rating, made by External Credit Assessment Institutions (ECAIs) recognized as eligible by SBP for capital adequacy purposes.

The SECP said that any Risk Based Capital Regime (RBC Regime) tends to quantify the different types of risks (insurance, market, liquidity, credit, operational risk etc.) taken by an insurer and thereafter calculates the level of capital which shall commensurate with the level of risks undertaken. In general, RBC regimes ensure that insurers keep sufficient amount of capital on hand to support their operations and write coverage, and therefore protect shareholders, investors and their policyholders.

The solvency requirements currently prescribed under our regime does not fully reflect the levels of risks undertaken by insurance companies on their balance sheet as all risks are not quantified and do not create any explicit charge on the capital of the insurance company. Hence, no effective mechanism is available to determine the adequacy of capital of an insurer.

It is expected that introduction of RBC Regime in Pakistan would provide true reflection of the risks taken by insurers on their balance sheets and is expected to result in a more disciplined and financially resilient insurance sector in Pakistan.

The RBC Regime is further expected to help the regulator to allocate more focus and resources to entities that pose a greater risk to the system as a whole and/or are prone to a greater chance of failure, the SECP added.

Copyright Business Recorder, 2022