Context: Recently, the Insurance Regulatory and Development Authority of India (IRDAI) has identified the Life Insurance Corporation of India (LIC), General Insurance Corporation of India (GIC) and The New India Assurance Co. as Domestic Systemically Important Insurers (D-SIIs) for 2020-21.
Background

• In January 2019, IRDAI announced the formation of a committee on D-SIIs.
• The constitution of the committee came in the backdrop of the International Association of Insurance Supervisors (IAIS) asking all member countries to have a regulatory framework to deal with Domestic-SIIs.
• The IAIS is a voluntary membership organization of insurance supervisors from over 200 jurisdictions, constituting 97% of the world's insurance premiums. It is the international standards-setting body for the insurance sector.

Key takeaways

• The three public sector insurers shall raise the level of corporate governance, identify all relevant risks and promote a sound risk management culture.
• As D-SIIs, they will also be subjected to enhanced regulatory supervision.
• D-SIIs shall be listed on an annual basis.
• Size in terms of total revenue, including premium underwritten and the value of assets under management are among the parameters on which the insurers are identified. 

About Domestic Systemically Important Insurer (D-SIIs)

• D-SIIs refer to insurers of such size, market importance and domestic and global interconnectedness whose distress or failure would cause a significant dislocation in the domestic financial system.
• Their continued functioning 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. Such a perception and the expectation of government support may amplify risk taking, reduce market discipline, create competitive distortions and increase the possibility of distress in future.

How are they classified?

• To identify such insurers and put them to enhanced monitoring mechanism, IRDAI has developed a methodology for identification and supervision of D-SIIs.

The parameters, as per the methodology, include:

• 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.

Implications

• The three insurers will now be subjected to enhanced regulatory supervision.
• They have also been asked to raise the level of corporate governance, identify all relevant risks and promote a sound risk management culture.

Reasons

• The insurance sector had grown exponentially in the last 15 years and a few of the insurers have a sizeable market share and interconnected with other financial institutions as well.
• With perception of TBTF 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.

Concerns

• Given the nature of operations and their systemic importance, the failure of D-SIIs has the potential to cause significant disruption to the essential services they provide to the policyholders and, in turn, to the overall economic activity of the country.
• These considerations require that D-SIIs should be subjected to additional regulatory measures to deal with the systemic risks and moral hazard issues.
• Systemic risk is the possibility that an event at the company level could trigger severe instability or collapse an entire industry or economy.
• Moral hazard is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost. It arises when both the parties have incomplete information about each other.