IRDAI nudging insurers to keep close eye on investee firms welcome, here's why

Insurance companies largely remained passive investors. But, in a welcome move, the Insurance Regulatory and Development Authority of India (IRDAI) has finally nudged a behavioural change.

The regulator has demanded that insurers keep a close eye on their investee firms and disclose this publicly. After all, it is policyholder’s money that is being invested in these companies. It said that while insurers can determine their own engagement strategy, the stewardship policy should clearly set out the criteria/circumstances in which they will actively intervene. The regulator also said that the policy should provide for regular assessment of the outcomes of intervention by the insurer.

Stewardship refers to a set of best practices which insurance companies need to follow. IRDAI has now offered a fresh set of these examples to point out what insurers are required to do. "Intervention should be considered regardless of whether an active or passive investment policy is followed," IRDAI said. This is a crucial development and puts the onus on the insurer to ensure that investee firms’ maintain proper financial health and sound corporate governance.

It has been predominantly noticed that insurers abstain from voting on crucial matters in investee firms. In a few cases, smaller insurers blindly followed the voting decisions of their larger counterparts. Considering that policyholder funds are being used to invest, it is pertinent that independent calls regarding board matters are taken by each insurer.

For voting, IRDAI has made the policy more concrete to ensure that insurers do not sit back and let companies make wrong business decisions. For insurers with assets up to Rs 2.5 lakh crore, if the insurer’s stake is 3 percent or above in a company they have to compulsorily vote. For those with assets above Rs 2.5 lakh crore, the mandatory voting threshold is 5 percent or above.

When investee companies fail, policyholder funds are impacted. A wrong business decision or a corporate governance lapse in these firms would create a negative impact on the stock price. This, in turn, hurts the investment income of insurers. Early signals of possible defaults or distress are available to insurers in such investee companies. Thus, rather than waiting for an entity to go to bankrupt, insurers could play an active role in questioning the action of such companies.

IRDAI has made it clear that the policyholder is the ‘ultimate investor’. Hence, all decisions taken in investee firms by insurers will now have to be periodically disclosed publicly. The regulator also said that this should be in a simple format that can be understood by the general public. There have also been cases where large insurers cross-invest in sister entities. IRDAI has said that potential conflict of interest scenarios also need to be disclosed by insurers. It said that a blanket ban on certain investments could also be considered.

For large corporates with legacy brand-names, it has often been noticed that the insurer sides with the investee firm management on strategic business decisions. This is despite minority shareholders and proxy advisory firms opposing such a move. In such cases, insurers need to apply rational thought to their voting decision and not blindly support the top leadership.

Insurers have been forced to take these steps in order to bring more transparency in the sector and protect policyholder interests. As a policyholder, individuals also need to seek and verify the investment decisions of their insurance company on a periodic basis. In fact, policyholders do and should exercise tremendous control over these decisions.

Source: Money Control