The Life Insurance Corporation of India (LIC), General Insurance Corporation of India, and The New India Assurance Co. have been recognized as Domestic Systemically Important Insurers (D-SIIs) for 2020-21. The designation was awarded by the Insurance Regulatory and Development Authority of India (IRDAI), an insurance regulator that discloses such insurers annually for the benefit of public information.
D-SII Requirements
Receiving the D-SIIs label comes with specific responsibilities the three public sector insurers must shoulder. These include enhancing their corporate governance standards, identifying and addressing relevant risks, and fostering a culture that prioritizes sound risk management. Moreover, IRDAI will subject these D-SIIs to increased regulatory supervision.
What are D-SIIs?
D-SIIs refer to insurers that are deemed ‘too big or too important to fail’ (TBTF). Predominantly, these insurers hold such significant influence in the market, domestically and globally, that any distress or failure on their part could severely disrupt the domestic financial system. Consequently, the unceasing operation of D-SIIs is crucial for ensuring continuous insurance service availability to the national economy.
Growth and Risks of the Insurance Sector
Over the last 15 years, the insurance sector has seen substantial growth, with several insurers securing a sizable market share and establishing connections with other financial institutions. This TBTF perception, coupled with an expectation of government support, could potentially encourage risk-taking, decrease market discipline, create competitive distortion, and increase future distress possibilities.
Concerns Regarding D-SIIs
Given their operational nature and systemic importance, potential failures of D-SIIs could significantly disrupt essential service provisions to policyholders, thereby affecting the country’s overall economic activity. To address such systemic risks and moral hazard issues, D-SIIs are required to follow additional regulatory measures.
Background of D-SIIs Designation
In January 2019, the IRDAI announced the formation of a committee on D-SIIs. This committee creation was instigated by the International Association of Insurance Supervisors (IAIS) urging all its member countries to establish a regulatory framework to manage Domestic-SIIs. The IAIS is an international standards-setting body for the insurance sector, with insurance supervisors from over 200 jurisdictions making up its membership.
About Domestic Systemically Important Banks (D-SIBs)
Much like D-SIIs, D-SIBs stands for banks that are ‘too big to fail.’ According to the Reserve Bank of India (RBI), such banks gain systemic importance due to their size, cross-jurisdictional activities, complexity, lack of substitute, and interconnection. In India, banks whose assets exceed 2% of GDP are considered D-SIBs. Currently, State Bank of India (SBI), ICICI Bank, and HDFC Bank have been tagged as D-SIBs.
Significance of D-SIBs
The failure of a D-SIB would cause a significant disruption to the essential services they provide to the banking system and the nation’s overall economy. Furthermore, the ‘too-big-to-fail’ tag indicates expected government support in times of distress. As a result of this perception, these banks often enjoy specific funding advantages. These banks are also subject to a particular set of policy measures concerning systemic risks and moral hazard problems.
