In a circular to all general, specialist, and health insurers in India, the Insurance Regulatory and Development Authority of India (IRDAI) has prohibited carriers from entering into any fresh Capital Gearing treaties, effective March 28th, 2020.
Capital gearing concerns the volume of debt a company holds compared to its equity. According to the IRDAI, primary insurers in the country have entered into Capital Gearing treaties in numerous forms, including quota share reinsurance arrangements.
However, after examining the terms of these treaties the IRDAI has concluded that such Capital Gearing treaties “are of the nature of financial arrangements and not primarily a risk transfer mechanism.” Ultimately, says the Authority, insurers have adopted these treaties in an effort to improve the solvency margin ratio.
As a result, the IRDAI has said that with immediate effect, no insurer shall enter into any new Capital Gearing treaties.
Furthermore, those with such arrangements in place must submit an approved action plan to the IRDAI no later than June 30th, 2020 for phasing out the treaties, and the direct insurers must also create appropriate reserves towards unearned premium reserves, premium deficiency reserves, and outstanding claims reserves in accordance with IRDAI regulations.
