Regulation and Capital Management
Regulation and Capital Management
This domain tests prudential regulation, capital requirements and how insurers allocate capital to risk.
Core rules and concepts
- Regulation protects policyholders, promotes market confidence and requires fit and proper governance.
- Capital absorbs unexpected losses; technical provisions cover expected liabilities.
- Solvency regimes set a control level, often expressed as a ratio of available capital to required capital.
- ORSA links risk profile, capital needs and business plan; IFRS 17 changes insurance accounting, not solvency.
- Capital management covers dividends, reinsurance, hedging, subordinated debt and risk transfer.
Worked example
Net liabilities are INR 1,000 crore. The required solvency margin is 150% of net liabilities, so required assets are INR 1,500 crore. Available assets are INR 1,650 crore. Solvency ratio = 1,650 / 1,500 = 110% of the requirement, or 165% on the common base of net liabilities. The insurer is above the control level but should test how a 200 crore asset fall affects the buffer.
Traps
Mixing solvency capital with accounting profit, ignoring capital fungibility across entities, and assuming reinsurance frees capital without credit risk. Also treating the control level as a target rather than a minimum.