Irdai lists LIC, GIC Re, New India as ‘too big to fail’, need enhanced supervision

Irdai lists LIC, GIC Re, New India as ‘too big to fail’, need enhanced supervision
The regulator’s move has come before the govt decide to list the shares of LIC on the stock exchanges through an initial public offering (IPO) next year. GIC Re and New India are already listed on the exchanges.

IRDAI has said life assurance Corporation (LIC), General Insurance Corporation (GIC Re) and New India Assurance – are ‘too big or too important to fail’ institutions.
The Insurance Regulator and Development Authority of India (Irdai) has named three public sector insurance companies — life assurance Corporation (LIC), General Insurance Corporation (GIC Re) and New India Assurance – as ‘too big or too important to fail’ (TBTF) institutions or Domestic Systemically Important Insurers (D-SIIs), which can require enhanced regulatory supervision and a better level of corporate governance.

The regulator’s move has come before the govt decide to list the shares of LIC — India’s largest financial entity with assets of Rs 32 lakh crore — on the stock exchanges through an initial public offering (IPO) next year. GIC Re and New India are already listed on the exchanges.

LIC’s gross total income grew to Rs 615,882.94 crore for the year ended March 2020 from Rs 560,784.39 crore, showing a growth of over 9.83 per cent. GIC Re is that the largest reinsurance company – or insurer’s insurer – with a gross premium income of Rs 51,030 crore. New India which is that the largest general insurance firm within the country had total global assets of Rs 74,609 crore as of March 2020. “Given the character of their operations and therefore the systemic importance of the D-SIIs, these insurers are asked to boost the extent of corporate governance and identify all relevant risk and promote a sound risk management culture,” IRDAI said.

EXPLAINED
Failure may bring distress
The insurance regulator said Domestic Systemically Important Insurers (D-SIIs) ask insurers of such size, market importance and domestic and global inter connectedness whose distress or failure would cause a big dislocation within the domestic economic system .

The Federal Reserve Bank of India (RBI) had last year named depository financial institution of India (SBI), ICICI Bank and HDFC Bank as Domestic Systemically Important Banks (D-SIBs), which in other words mean banks that are too big to fail. As per the RBI norms, these banks will need to put aside more capital for his or her continued operation.

The insurance regulator said D-SIIs ask insurers of such size, market importance and domestic and global inter connectedness whose distress or failure would cause a big dislocation within the domestic economic system . “Therefore, the continued functioning of D-SIIs is critical for the uninterrupted availability of insurance services to the economy . D-SIIs are perceived as insurers that are ‘too big or too important to fail’” it said.

This perception and therefore the perceived expectation of state support may amplify risk taking, reduce market discipline, create competitive distortions, and increase the likelihood of distress in future. These considerations require that D-SIIs should be subjected to additional regulatory measures to affect the systemic risks and financial loss issues, IRDAI said.

In order to spot such insurers and to place such insurers to enhanced monitoring mechanism, IRDAI developed a strategy for identification and supervision of D-SIIs. The parameters, as per the methodology for identification of D-SIIs include the dimensions of operations in terms of total revenue, including premium underwritten and therefore the value of assets under management, global activities across quite one jurisdiction, lack of substitutability of their products and/or operations and interconnectedness through counterparty exposure and macro-economic exposure.

“These parameters were assigned weights to hide various aspects of their operations. The Authority would identify D-SIIs on an annual basis and disclose the names of those insurers for public information,” it said.

“Given the character of their operations and therefore the systemic importance of the D-SIIs, these insurers are asked to boost the extent of corporate governance and identify all relevant risk and promote a sound risk management culture. D-SIIs also will be subjected to enhanced regulatory supervision,” IRDAI said.

“All the choices regarding listing of LIC shares are taken by DIPAM, Ministry of Finance. During the last FY 2019-20, our market share as of March was 68.92 per cent and as of July 2020, the market share in FYPI (first year premium income) was 71.49 per cent which shows a rise of 257 basis points,” LIC MD Vipin Anand said in an interview recently.

GIC Re registered a net loss of Rs 359.09 crore in FY 2020 as compared to a net income of Rs 2,224.31 crore in FY19 because it took an important beating within the December quarter. For the complete year, the gross premium income grew 15.35 per cent to Rs 51,030.13 crore from Rs 44,238 crore in FY19. For the complete fiscal, New India Assurance registered a net income of Rs 1,417.75 crore in 2019-20 as against Rs 579.79 crore within the previous fiscal. Its total income in 2019-20 rose to Rs 28,046.56 crore from Rs 25,272.38 crore a year ago.

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