Capital Gearing Treaties

भारतीय  बीमा  )व+नयामक  और  )वकास  0ा1धकरण   INSURANCE  REGULATORY  AND   DEVELOPMENT  AUTHORITY  OF  INDIA सव4  नं.  115/1,  फाइन;<सयल  >डिABCट,  नानकरामगुड़ा,  हैदराबाद  –  500  032,  भारत   +91-­‐40-­‐2020  4000  वेबसाइट  :  www.irdai.gov.in   Survey  No.  115/1,  Financial  District  ,  Nanakramguda,  Hyderabad  –  500  032,  India   +91-­‐40-­‐2020  4000  Website  :  www.irdai.gov.in   Circular Ref  No:  IRDA/F&A/CIR/MISC/  076/03/2020     28th  March,  2020 To,    CMDs/CEOs    All  General  Insurers,  Health  Insurers  and  Specialized  Insurers Sub:  Capital  Gearing  Treaties    Ref:   (i)   IRDAI  (Assets,  Liabilities,  and  Solvency  Margin  of  General  Insurance  Business)   Regulations,  2016;;  and   (ii)   IRDA  (Preparation  of  Financial  Statements  and  Auditor’s  Report  of  Insurance   Companies)  Regulations,  2002. It  has  been  observed  that  some  of  the  insurers  have  entered  into  Capital  Gearing  treaties  in   various  forms  including  Quota  Share  Reinsurance  Treaty.  The  terms  of  these  treaties  have   been  examined,  and  the  Authority  is  of  the  considered  view  that  such  Capital  Gearing  treaties   are  of  the  nature  of  financial  arrangements  and  not  primarily    a  risk  transfer  mechanism.  It   appears  that  insurers  have  adopted  these    arrangements    in  order  to  improve  the  solvency   margin  ratio. 2.   In  view  of  the  above,  the  Authority  hereby  directs  the  insurers  as  under:   a.   no  insurer  shall  enter  into  any  fresh  Capital  Gearing  treaties  effective  from  the  date  of   issuance  of  this  Circular;;  and   b.   Insurers  who  are  having  such  treaties  on  their  books  as  on  the  date  of  issuance  of  this   Circular  shall  take  the  following    steps:   i.   Submit  Board  approved  Action  Plan  to  the  Authority    on  or  before  30th  June,  2020   for   phasing   out   the  treaties  along   with   timelines  such   that   it   complies   with   the   Solvency  Stipulations. The   plan   of   action   shall   also     include   assessment   of   requirement   of     capital   infusion  and  sources  of  funds  for  the  capital  infusion  so  required  due  to  prospective   closure  of  these  Capital  Gearing  treaties. tiiiiJM irdai भारतीय  बीमा  )व+नयामक  और  )वकास  0ा1धकरण   INSURANCE  REGULATORY  AND   DEVELOPMENT  AUTHORITY  OF  INDIA सव4  नं.  115/1,  फाइन;<सयल  >डिABCट,  नानकरामगुड़ा,  हैदराबाद  –  500  032,  भारत   +91-­‐40-­‐2020  4000  वेबसाइट  :  www.irdai.gov.in   Survey  No.  115/1,  Financial  District  ,  Nanakramguda,  Hyderabad  –  500  032,  India   +91-­‐40-­‐2020  4000  Website  :  www.irdai.gov.in   ii.   the    direct  insurers  (cedants)  shall  create  appropriate  reserves  towards  Unearned   Premium  Reserves,  Premium  Deficiency  Reserves,  Outstanding  Claims  Reserves   (including   IBNR/IBNER)   in   accordance   with   IRDAI   (Assets,   Liabilities   and   Solvency  Margin  of  General  Insurance  Business)  Regulations,  2016.  Further,  such   treaties   have   to   be   accounted   for,   based   on   the   principle   of   “Substance   over   Form”,  as  prescribed  by  para  2.13  of  Master  Circular  on  Preparation  of  Financial   Statements  issued  by  the  Authority  in  October  2012. All  insurers  are  advised  to  take  note  of  the  above  for  compliance.      -­Sd-­   (Pravin  Kutumbe)   Member-­F&I tiiiiJM irdai