Chennai: Banning Capital Gearing treaties between primary and reinsurers, the Indian insurance regulator has asked the insurers to phase out such treaties already entered with timelines.
The Insurance Regulatory and Development Authority of India (IRDAI) in a circular to all general/health/specialised insurance companies said some insurers have entered into Capital Gearing treaties in various forms including Quota Share Reinsurance Treaty.
“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,” IRDAI said in the circular.
Banning insurers from entering into fresh Capital Gearing treaties, IRDAI has asked the insurers who have such treaties on their books to (a) Submit a Board-approved action plan to it on or before 30.6.2020 for phasing out the treaties along with timelines such that it complies with the solvency stipulations and (b) The direct insurers shall create appropriate reserves towards Unearned Premium Reserves, Premium Deficiency Reserves, Outstanding Claims Reserves in accordance with IRDAI (Assets, Liabilities and Solvency Margin of General Insurance Business) Regulations, 2016.
According to IRDAI, the action plan for phasing out of the treaties shall also include assessment of requirement of capital infusion and sources of funds for the capital infusion so required due to prospective closure of these Capital Gearing treaties.
With the country under lockdown to prevent the spread of Coronavirus, the IRDAI has permitted insurers to file their Board approved final reinsurance programme on or before May 31 instead of April 30, 2020, for fiscal 2020-21.
