Solvency Breach, Dividend and Reinsurance Approval
Sunrise General Insurance has a solvency ratio of 1.35 against the regulatory requirement of 1.50. It has proposed a dividend of ₹12 crore to shareholders, filed a group health product offering a 15% discount against its filed master product, and ceded 40% of its fire portfolio to a foreign reinsurer not registered in India. The board argues that the reinsurance will improve solvency and that the dividend is needed to retain investor confidence. The regulator has not yet approved the product or the dividend. The insurer also wants to reduce its unexpired risk reserve by 10% to boost profit. Its gross premium income is ₹800 crore, and 30% of the fire portfolio is from a single industrial group. The reinsurer has a credit rating of BBB.
1. What regulatory action is likely on the solvency ratio and the proposed dividend?
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A solvency ratio of 1.35 is below the required 1.50. The regulator can require a corrective action plan, restrict new business, prohibit dividend, and require capital infusion. The proposed ₹12 crore dividend should not be approved while solvency is below the control level; dividend payments are subordinated to policyholder protection and require regulatory clearance. The board's investor-confidence argument does not override solvency. Reducing the unexpired risk reserve by 10% merely to boost profit is not permissible; the reserve must be computed actuarially and consistently with the regulations. If the insurer wants to pay a dividend, it must first restore solvency above the required level.
2. Analyse the group health product with a 15% discount and the proposed reinsurance with the unregistered foreign reinsurer.
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The group health product offering a 15% discount against the filed master product is not automatically valid. Product pricing must be actuarially justified, fair, and not unfairly discriminatory. A discount that is not supported by the master product's filed terms or by experience may be rejected. The insurer must file the product with the regulator or use the applicable file-and-use procedure and certify compliance. It cannot launch before approval where approval is required.
Ceding 40% to a foreign reinsurer not registered in India requires regulatory approval and may not receive solvency credit. The BBB credit rating may not meet the regulator's minimum for unregistered reinsurers. The insurer should use a registered Indian reinsurer, an IFSC reinsurer, or obtain specific approval. The reinsurance may reduce net risk but does not cure the solvency breach by itself. The concentration of 30% of the fire portfolio in one industrial group also raises risk-management concerns that the regulator will examine.