Life Insurance Company Valuation and Solvency
This domain covers statutory valuation of liabilities and the solvency margin that determines whether an insurer can continue writing business.
Valuation and solvency rules
Under the IRDAI (Assets, Liabilities and Solvency Margin) Regulations, 2016, insurers value mathematical reserves using prudent assumptions for mortality, interest, expenses and lapse, with margins for adverse deviation. Future profits are not anticipated. The solvency ratio is Available Solvency Margin (ASM) divided by Required Solvency Margin (RSM), and must be at least 150%. ASM includes capital, reserves and the excess of assets over policyholders' liabilities, but excludes inadmissible assets. RSM follows the prescribed formula applied to reserves and sum at risk. The appointed actuary certifies the valuation and reports on solvency.
Worked example
An insurer has ASM of ₹1,800 crore and RSM of ₹1,200 crore, giving 150% - exactly the control level. If a reserve strengthening raises RSM to ₹1,300 crore, the ratio falls to 138.5%, a breach. To restore 150%, the insurer needs ASM of ₹1,950 crore, i.e. ₹150 crore of additional capital or equivalent reduction in RSM.
Traps
Crediting future profits; including inadmissible assets such as doubtful receivables; comparing a solvency ratio with an economic capital ratio; using market values inconsistently; ignoring guarantees and options embedded in liabilities.