The Securities and Exchange Commission of Pakistan (SECP) has decided to develop and implement a risk-based capital regime for the insurance sector in a phased manner.
According to its statement, SECP has decided to form a technical working group comprising officials of the commission’s Insurance Division, the Pakistan Society of Actuaries, and insurance companies, tasked with the responsibility of developing the risk-based capital regime.
As per the currently applicable regime in Pakistan, compliance-based paid-up capital requirements and solvency requirements are levied on the insurance companies.
The solvency regime does take into account, to some extent, liquidity risk, credit risk, market risk, insurance risk, etc, in the calculation of solvency through admissibility of assets test; however, it does not quantify the levels of different risks borne by the insurers and; therefore, does not deliberate on the adequacy of capital keeping in view the risks undertaken.
The majority of international jurisdictions had already shifted or have commenced working to move towards the RBC regime for their insurance sector. The introduction of RBC will provide a true reflection of risks taken by insurance companies and will result in a more disciplined and financially resilient insurance sector in Pakistan.
SECP believes that for the RBC to be implemented, the most important part will be the quantification of the different risks faced by the insurance companies including their correlation/ interconnectedness in relation to the size and complexity of an insurer.