Domestic Systemically Important Insurers

• 26 Sep 2020

Why in News

The Life Insurance Corporation of India (LIC), General Insurance Corporation of India and The New India Assurance Co have been identified as Domestic Systemically Important Insurers (D-SIIs) for 2020-21 by insurance regulator, the Insurance Regulatory and Development Authority of India (IRDAI).

• The IRDAI would identify D-SIIs on an annual basis and disclose the names of such insurers for public information

Key Points

• Requirements for D-SIIs:
  
  • The three public sector insurers have been asked to raise the level of corporate governance.
  • Identify all relevant risks and promote a sound risk management culture.
  • The D-SIIs will also be subjected to enhanced regulatory supervision of the IRDAI.
• Domestic Systemically Important Insurers:
  
  • D-SIIs are perceived as insurers that are ‘too big or too important to fail’ (TBTF).
  • 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.
  • Thus, the continued functioning of D-SIIs is critical for the uninterrupted availability of insurance services to the national economy.
• 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.
• 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.

Domestic Systemically Important Bank (D-SIBs)

• D-SIB means that the bank is too big to fail. According to the Reserve Bank of India (RBI), some banks become systemically important due to their size, cross-jurisdictional activities, complexity and lack of substitute and interconnection. Banks whose assets exceed 2% of GDP are considered part of this group.
• Presently, the State Bank of India (SBI), ICICI Bank, and HDFC Bank have been identified as DSIBs in India.
• Significance:
  
  • Should such a bank fail, there would be significant disruption to the essential services they provide to the banking system and the overall economy.
  • The too-big-to-fail tag also indicates that in case of distress, the government is expected to support these banks.
  • Due to this perception, these banks enjoy certain advantages in funding. It also means that these banks have a different set of policy measures regarding systemic risks and moral hazard issues.

Source: TH