These rules are a welcome beginning in prescribing a written code for insurers and intermediaries and spelling out their role and obligations — both at the time of pre- and post-sales — to the policyholders. It should also be noted that policyholders' interest has another dimension — financial security.

It is imperative that the insurers have the continuous financial soundness and viability, enabling them to honour their commitments to the policyholders as and when a claim arises under the policy.

For this to happen, insurers should maintain adequate solvency margins and credible reinsurance arrangements. As an additional safeguard we can also think about a separate 'policyholders' protection fund'.

Strict enforcement is a must
By and large IRDA's solvency margin regulations are in consonance with those followed in most developed insurance markets. But given the volatility in financial markets, impinging on safety of investments and returns thereon, the huge accumulations of risks and catastrophic losses witnessed in the recent past, the 100-per cent solvency margin prescribed by IRDA may not be adequate unless it maintains a constant vigil over the insurers.

In many markets, a general insurance company is considered sound if the solvency margin ratio is 200 per cent or more. If the ratio is less than 200 per cent, the regulations insist on submission of the business improvement plan.

A solvency margin of about or less than 100 per cent — as it is in India — is considered to be rather dangerous, requiring very close monitoring and stringent actions including prohibition on payment of dividends, remuneration to the directors, restrictions on business operations, expenses of management and several such other measures.

The recent failures and bankruptcy of the insurers in developed markets like the US, Japan and the UK despite stringent solvency margin requirements offer quite a few lessons to be learnt by the emerging markets like India.

Given the just-adequate solvency margin position, it is imperative on the part of IRDA to have an early warning and efficient monitoring system to enforce the compliance of the regulations.

As an added measure of building confidence among the public at large, IRDA should introduce a system of rating of insurance companies based on solvency margin ratios. This will enable the policyholders to know about the financial strength or weakness of an insurer. Rating can also address other issues like the adequacy of provisions for outstanding claims and the average time taken for settlement of claims.

Credible reinsurance
Under the present dispensation, each insurer has to get his annual reinsurance programme approved by IRDA. Though the regulator is taking precautions in ensuring placement of reinsurance with rated reinsurers, there is no guarantee that reinsurance commitments will always be honoured.

A single failure of an overseas reinsurer may have serious repercussion on Indian players. Unfortunately, in the absence of a database to ascertain accumulations of risks and exposures, it is extremely difficult to design reinsurance arrangements on a scientific basis. And, this is an area where considerable attention is required to safeguard the interests of the Indian insurers and their policyholders.

A fund to protect the policyholders
IRDA also needs to consider initiating a separate insurance policyholders' protection fund to protect the interests of the policyholders in the event of contingencies like insolvency or financial default by insurers.

A small and humble beginning can be made now so that the burden of contribution to such a fund by insurers can be kept at a minimum. Many countries have taken such initiatives and in Japan, a statutory corporation known as Non-Life Insurance Policyholders' Protection Corporation has been established for the purpose.

Indian financial markets have had serious troubles in the recent past, hurting the interests of investors and therefore it is expedient that the insurance market takes the initiative in instilling confidence among policyholders by initiating such a fund immediately.

A substantial part of the non-life market has the protection of the tariff and administered price regime and a competition in pricing is yet to emerge. This is perhaps the most opportune time to make a beginning.

(The writer is the former chairman-cum-managing director of New India Assurance Company and United India Insurance Company. He is presently an honorary director of Centre for Insurance Studies & Research at National Law University, Jodhpur. This is the first part of the series on the subject. will appear soon.)