An attempt is made to compare the global and Indian scenarios with regard to risk-based supervision of the life insurance companies.

As an integral part of their financial sector deregulation programmes, many developed and developing countries deregulated the life insurance sector during 80's and 90's. As such, the changing equations in the financial markets and emergence of financial conglomerates have only increased the contingencies and uncertainties as the markets have become more integrated. This provided the necessary impetus to evolve best practices in the area of life insurance business.

These are the days of financial sector consolidation and growing integration of financial markets. The objective of the present article is to discuss the important issues in the supervision of insurance business both at the national and global level. Life insurance companies in the course of their business activities are exposed to three types of risks. They are insurance, investment and operational risks.

Insurance risk relates to the risk if an inappropriate underwriting strategy is adopted (e.g., involving an inappropriate pooling of risks and adverse selection), that the chosen strategy is inadequately implemented or an unexpected loss arise even though an appropriate strategy is adequately implemented. Such risks could arise on account of failure on the part of the management to assess the true risk involved in an insurance coverage. Inter alia, these risks include underwriting risks, catastrophe risks and deterioration of technical reserves.

Market risk is the risk to an insurer's financial condition arising from adverse movements or volatility of market prices. Market risks that arise primarily due to adverse movements in the value of an insurer's assets, both off and on balance sheet. The adverse movements could be on account of changes in interest rates, foreign exchange rates, equity values, etc., and the corresponding movement in the value of assets. Market risks also include the exposure of derivatives to movements in the price of the underlying instrument or risk factor and other unanticipated movements in financial variables. Further, market risk includes non-diversifiable market risk (on all investments) and diversifiable market risk (on each investment).

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