If Insurance Company goes Bankrupt, What can We Do?

Investment in terms of premium in an insurance product is made with the intent to safeguard any future financial risks owing to the sudden death of the insured or for help during any medical crisis. It is the hard earned money of the person that is paid to the insurance company to stay secure. Therefore the very thought of a life insurance plan going into loss due to the insurer’s bankruptcy is scary enough to make anyone nervous.

But is it even possible for an insurance company to go bankrupt?

To answer this question, let’s first understand how an insurance company comes into being and the basic guidelines, it has to adhere as per the Indian insurance regulator, to function in the market.

As per the Insurance Regulatory and Development Authority of India, IRDAI, a company has to be registered and needs approval to initiate its operations in India. It cannot be any company owing to start an insurance business. The basic capital required to enter the insurance sector to sell insurance policies in India is Rs. 100 crores and IRDA has complete authority to cancel the license of the insurer in case the insurer is not abiding by the prescribed guidelines.

The license of the company is also renewed by the regulator and the financial accounts of your insurance company is also audited by the regulator.
Now that the company is in existence and operating in the market, one of the crucial parameters to check its financial standing is the Solvency Margin. This can be explained in simple words as the amount of cash reserve to be kept by the company to pay claims in times of an emergency. As per IRDAI guidelines, a company needs to maintain an average solvency margin of 150%. This means that if a company has insured its customers with life insurance plan worth Rs. 100/-, then it has to keep Rs. 150/- with IRDAI as solvency margin. Higher the solvency margin, the safer is the company. The various companies providing insurance policies in India have different solvency margins and are not allowed to go below the benchmark.

The best part about these guidelines is that they are equal for both, government-run as well as private insurers. Nobody can close their business and run away just like that. If any private company wants to close the business or move to another business, then it has to merge the existing business with another company that takes over the control along with assets and liabilities of the company. The onus to provide best life insurance to new customers and take care of the interests of existing customers, then lies with the new operator that also has to adhere to all the guidelines set by IRDAI as well.

IRDAI is in existence with the prime motive to protect the interest of the policy holders. It is responsible for bringing an insurance company into being by defining the rules and regulations, ensuring these are met and it also takes care to ensure the company functions as per the given guidelines. IRDAI makes policies to primarily safeguard insurance holders’ interests and also audits the activities and books of insurance companies and any intermediaries involved. It also has a right to cancel the license of an insurance company not meeting the guidelines or flouting any rules causing losses to the policy holders. If any customer has any complaint against an insurer, it can approach the grievance cell of IRDAI and be assured that a resolution will be provided.

Given the kind of capital that is required to start the business, stay in the business and run operations along with strict regulations that are effectively implemented too, it is nearly impossible for insurance companies to go bankrupt or let the insured customer’s future hang in thin air. Therefore, go ahead and gift yourself and your family the best life insurance plans without worrying about the company’s solvency.

Harjot Singh Narula

Harjot Narula is founder and CEO of ComparePolicy.com, an IRDAI approved insurance web aggregator focussed on selling online insurance for companies. Harjot has more than a decade of experience in software development and has also spent 5 years in US working for the mortgage and risk management industry.

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