Insurance Regulatory and Development Authority (Irda) is planning to set up a committee to analyse the risks faced by insurance companies promoted by banks. Irda will approach the Reserve Bank of India (RBI) and is likely to announce the formation of the committee by the end of this month.

A senior Irda official said there are mainly three risks that a bank-backed insurance company faces. These are investment risk, capital risk and cost connecting risk. The terms of reference and the setting up of the committee would be announced after discussions with the banking regulator.

According to the official, bank-backed insurance companies have capital related risks, as the ability to infuse more capital in the insurance venture reduces for various reasons, including increase in non-performing assets (bad loans).

“Banks have been finding it difficult to maintain their capital adequacy ratio and are not adequately capitalised, hence the risk on maintaining the solvency margin for the insurance company becomes an issue,” the official explained.

Irda also wants to demystify the investment related risk in case of a bank-sponsored insurance company. Insurance companies are not allowed to invest more than 5-10 per cent in a single company at present. “The issue of cross holding arises here where one doesn’t know which money is going where,” the official said.

According to the official, with derivatives finding favour among investors and no one knows which asset is packed where, it has become necessary for the regulator to understand the risk involved when the parent of an insurance company is a bank.

The other issue Irda wants to address is the cost advantage banks derive from their vast network of branches when selling insurance. Insurance companies, which do not have a bank as a promoter, are at a disadvantage vis-à-vis bank promoted insurance firms. The Irda official said the regulator wants to analyse the underlying cost-connection in the case of insurance companies set up by banks.