19-01-2021

IRDAI may relax investment limit for insurers due market volatility

Insurance Alertss
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19-01-2021
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IRDAI may relax investment limit for insurers due market volatility

The Insurance Regulatory and Development Authority of India (IRDAI) may relax the investment norms very soon. Insurance companies have already given a presentation to IRDAI on this issue. IRDAI has a prescribed framework on how much investment insurance companies should do in various asset classes starting from equity to government securities. But currently, equity markets are trading at all-time high and weight of the sectors and companies in benchmark is much above to regulatory restriction. IRDAI has been reviewing the proposal and may tweak the existing guidelines.

“IRDAI may consider relaxing limits for some of the issuers, management groups and sectors to align exposure to fund’s Benchmarks. For instance in Nifty, BFSI weight is 36% and IT sector weight is above 15% however regulations restricts exposure to 25% and 15% respectively. HDFC Group weight is 16.5% however regulations restricts to 15%,” said a person close to the development, who doesn’t want to be quoted.

According to IRDA’s prescribed framework Insurance companies invest in the following

Type of Investment Limit of investment
Government securities Not exceeding 25%
Equity/ Preference Shares/ Convertible portion of Debentures at face value Not exceeding 10%
Investment in Equity Capital, Bonds, Debentures, Term Loans. Not exceeding 10%
Debentures - (face value) including private placed NCD and Non convertible portion of Convertible Debentures.
Investment in Equity Capital, Bonds, Debentures, Term Loans. Not exceeding 10%

Insurance companies claim that the market and asset classes have also been changed and ocus has been shifted amongst various asset classes. If the insurers don’t change accordingly they may not be able to generate the best returns for their policyholders.

“IRDAI mandates 4% minimum guarantee on discontinued fund. In current yield scenario wherein we are in historically low yield market and liquid yields are trading much below 4%. It would be difficult for insurance companies to meet 4% guarantee and may lead to shareholder funding to meet such guarantee. IRDAI may consider linking this guarantee rate to SBI saving bank account rate or liquid fund benchmarks to make it more market oriented and realistic to meet,” he explained

In the revised investment framework, IRDAI may also look at Mark to Market (MTM) in the derivative segment to support the solvency ratio.

“As per requirement under solvency calculations, any unrealized loss in derivative shall need to be considered under solvency however any gains shall need to be ignored. Due to continued fall in yields, solvency of most insurance companies has been impacted and this requirement of considering derivative MTM losses further impacting the solvency position of the companies. As in insurance sector derivatives are allowed only for hedging purposes and interim MTM losses are temporary in nature. IRDAI may consider to exclude derivative MTM losses from solvency calculation,” he added.

Earlier only Life Insurance Corporation (LIC) used to seek IRDAI’s permission to relax the norms for equity investments. Because LIC was formed even before IRDAI and it had far more stake in the banks and many companies than what IRDAI had prescribed. Now private companies too are looking for high exposure.

Source: The Economic Times



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