The adoption of Risk-Based Capital (RBC) rules by the Indian insurance industry is more a strategic and forward-looking shift focussing not just on stability but also on expansion, and attracting long-term investment. It can better align India with global standards (e.g., Solvency II, ICS) and boosting investor confidence with more transparent company valuations, and enabling more efficient capital use, unlocking resources for growth and product innovation
Davide Corradi, Managing Director and Senior Partner, Boston Consulting Group(BCG),
Steven Chen, Partner and Associate Director, BCG,
Pallavi Malani, Managing Director & Partner, BCG,
Mohak Ghelani, Senior Associate, BCG
The Indian insurance sector is looking at an entirely new way of managing investments with the Insurance Regulatory and Development Authority of India (IRDAI) gearing up to introduce a Risk-Based Capital (RBC) framework. This long-anticipated regulatory shift is set to modernize the capital structure of insurers, bringing India in line with global best practices and ensuring financial resilience in a rapidly expanding market.
Davide Corradi, Managing Director and Senior Partner,BCG
Expected to take effect by FY2026, RBC will replace the current static solvency-based model with a system that ties capital requirements directly to an insurer’s risk profile.
According to a recent Boston Consulting Group (BCG) report “The Risk Opportunity”, this change will represent not just a compliance exercise but a strategic turning point for the industry. The report highlights that India’s insurance market, despite reaching $135 billion in Gross Written Premiums (GWP) in FY2024, still lags behind global averages in penetration at just 3.7%, far below the 7% global average. They expect the RBC framework to create a more robust and sustainable capital regime that will encourage growth while mitigating risks.
Steven Chen, Partner and Associate Director, BCG
A Necessary Reform for a Growing Market
The current solvency system, which mandates insurers to maintain a minimum solvency ratio of 150%, is built on a formula-driven approach that does not distinguish between insurers based on their risk exposure.
However “this one-size-fits-all model results in inefficient capital allocation, where even insurers with low-risk portfolios are required to hold disproportionately high reserves.
Pallavi Malani,Managing Director & Partner, BCG
By contrast, the RBC model assigns capital requirements based on market risk, underwriting risk, credit risk, and operational risk, ensuring that insurers with well-diversified and lower-risk portfolios can deploy capital more efficiently. The report emphasizes that adopting RBC will help Indian insurers improve financial resilience and align their risk-taking with global standards, making them more competitive on the international stage.
Mohak Ghelani, Senior Associate, BCG
Global Insights: What India Can Learn from Other Markets
Many advanced markets, including Europe, the U.S., South Korea, and Hong Kong, have already implemented RBC frameworks with positive results. The Solvency II regime in Europe, for example, has led to a greater focus on enterprise risk management, making insurers more accountable for their capital planning decisions. The BCG report points to South Korea, where RBC implementation resulted in increased use of reinsurance, helping insurers optimize capital-heavy exposures while maintaining their solvency positions.
Hong Kong’s RBC adoption, meanwhile, led insurers to strengthen their Asset-Liability Management (ALM) strategies, ensuring that investment risks were dynamically aligned with long-term liabilities. Hong Kong is talked about as a prime example of how RBC can drive investment diversification, allowing insurers to move beyond restrictive asset mandates and take a more strategic approach to portfolio management.
In fact, the strategic implications of Solvency 2 are often overlooked in favour of technical developments in most discussions.
Solvency II fundamentally reshaped the European insurance landscape forcing insurers to rethink their business models from the ground up to match the evolving relative attractiveness of products, segments, and channels as a result of the shift.
How Will RBC Impact Indian Insurers?
For Indian insurers, the RBC transition will certainly bring significant operational and strategic changes. One of the most immediate impacts will be on capital deployment. As the report explains, insurers will now need to align their capital reserves with actual risk exposure, meaning that those with risk-heavy portfolios may need to rethink their business strategies.
Well-capitalized players could reinvest excess capital into growth initiatives, while certain smaller or risk-heavy insurers may explore options like raising additional capital, restructuring portfolios, or using reinsurance to free up reserves.
Investment strategies will also see a transformation. Under the new model, capital charges will be linked to asset composition, forcing insurers to reassess their portfolio allocations.
The BCG report suggests that larger insurers may increase exposure to high-yield assets, while those with limited capital buffers might shift towards low-risk investments, such as government bonds. This will encourage the development of more sophisticated ALM practices to manage risk more effectively.
While theoretically this regulation should also have a significant impact on product offerings and pricing, the exact impact in the Indian context remains to be seen based on how IRDAI plans to design and structure the RBC framework.
For instance in the likes of Canada and Hong Kong, with higher capital requirements placed on products with long-term guarantees, insurers needed to restructure pricing for savings and endowment policies to ensure they remain viable – driving a gradual phase-out of high-guarantee policies in favor of hybrid savings products that better align with risk-based capital rules.
However, based on initial sentiment following the first Quantitative Impact Study in India, capital weights on products are not expected to be too onerous, indicating overall profitability may well continue to be the defining factor in product innovation decisions.
Beyond financial restructuring, RBC will also necessitate stronger governance frameworks and risk oversight. The report underscores how the role of Chief Risk Officers (CROs) has expanded, with CROs expected to play an even greater role in strategic decision-making going forward across different company sizes.
Additionally, insurers will be required to conduct regular stress testing and enhance transparency in solvency reporting, which will be key to maintaining market confidence.
Technology will be a crucial enabler of RBC implementation. Insurers will need to invest in advanced risk analytics, automation, and real-time reporting systems to comply with the new regulatory framework.
The BCG report suggests that insurers that proactively develop data-driven risk assessment models will be better positioned to navigate the transition smoothly.
BCG case studies show that in light of RBC deployment, companies can unlock significant value with better capital, investment, and risk management – showcasing examples of global insurance groups that have unlocked up to EUR 4.5 Bn in capital upstreaming, 15-20 bps incremental returns, etc.
Looking Ahead: The Road to Implementation
The journey to RBC adoption is already underway. Indian insurers are currently kicking off preparation for the second Quantitative Impact Study (QIS-II), which aims to refine the framework by assessing the impact of RBC on capital adequacy, liability measurement, and risk weightings.
As IRDAI fine-tunes the regulations based on industry feedback, insurers are expected to begin adapting their financial models and operational strategies in anticipation of the full rollout.
It is important to note that in most other markets, the implementation of RBC frameworks emerged in the wake of major financial and market crises that exposed significant vulnerabilities in capital adequacy and risk management practices, particularly across the U.S. and Europe. Events such as the 2008 global financial crisis, for instance, underscored the dangers of undercapitalized financial institutions and the systemic risks they posed.
Not so in India, where the shift is part of a more strategic and forward-looking plan. The focus here is not just on stability but also on expansion, and attracting long-term investment. RBC can do this by better aligning India with global standards (e.g., Solvency II, ICS) and boosting investor confidence with more transparent company valuations, and enabling more efficient capital use, unlocking resources for growth and product innovation.
“Unlike other markets where RBC was introduced reactively following financial crises, India is implementing the framework proactively in a period of strong market growth”, says Pallavi, encouraging insurers to view this as an opportunity to take advantage of greater international compliance and prepare in advance to optimize risk frameworks and future-proof their businesses. The report urges insurers to view this shift not just as a compliance challenge but as a chance to unlock value, enhance financial stability, and drive long-term profitability.
Conclusion: A Defining Era for Indian Insurance
The introduction of Risk-Based Capital is set to reshape the Indian insurance industry, driving a more sophisticated and stable capital structure. As the BCG report highlights, RBC will bring Indian insurers in line with global standards, improving competitiveness, attracting foreign investment, and ensuring financial sustainability. However, success will depend on the ability of insurers to adapt quickly, build strong risk management capabilities, and integrate advanced technology into their operations.
In the coming months, the collaboration between regulators, insurers, and policymakers will be crucial in ensuring a smooth transition. With the right strategies in place, RBC could well be the catalyst for India’s insurance sector to emerge stronger, more resilient, and globally competitive in the years ahead.
(Views are personal)