Irda mulls raising investment ceiling for all life insurers

Irda mulls raising investment ceiling for all life insurers


In a move that can increase the flow of money into equities, the insurance regulator is planning to raise the investment ceiling for all life insurers.

Currently, an insurer cannot buy more than 10% stake in a listed firm. This limit may be increased for life insurers soon, said Sudhin Roy Chowdhury, member (life) at the Insurance Regulatory and Development Authority, or Irda, on the sidelines of an insurance summit on Monday.

Enhancing the investment limit would mean more flow of money into the Indian stock market which is currently trading in a range, with profits of companies growing at a slow pace on rising input costs and interest burden.

Insurance regulations currently restrict insurers from buying more than 10% stake in any listed firm. In infrastructure firms, however, their holding in the form of both debt and equity can go up to 20%.

The state-owned Life Insurance Corp. of India, or LIC, the biggest life insurer with assets of at least Rs.13 trillion, has been arguing for a relaxation of this limit as it was too low for the insurer’s huge surplus available for investment.

“If the investment cap is increased, it will be for all insurers and not only LIC,” said Roy Chowdhury.

LIC currently has investments in excess of 10% in several listed companies.

The regulator is reluctant to relax the norms for one player. But when the investment limit is increased, LIC will be the biggest beneficiary as the equity holdings of other private life insurers are well below 10% in listed firms and they still have enough headroom to invest.

At the end of March, the life insurance industry’s equity assets were valued at around Rs.4.73 trillion.

If indeed the investment cap is raised beyond 10%, insurers will be able to invest more in equities of companies and this will boost the equity market.

Insurance firms play a critical role in the Indian equity markets. In 2008, the year of the collapse of US investment bank Lehman Brothers Holdings Inc. and an unprecedented credit crunch, foreign institutional investors or FIIs pulled out at least Rs.53,797 crore from Indian stocks but domestic institutional investors, led by life insurers, pumped in Rs.72,967 crore.

Mint had reported on 28 March, that Irda was looking at a proposal to allow LIC to buy more than 10% stake in a single firm.

“We are looking at a number of changes in the existing regulations, including investment,” Irda chairman J. Hari Narayan had said then. “Six committees are working to suggest the changes. The revisions will be subject to approval of the proposed insurance Bill. If we allow LIC to invest more than 10% (in listed companies), we will also allow other life insurers (to do that).”

“LIC may genuinely need a higher investment cap. But if the norms are relaxed, it will be for all,” Roy Chowdhury said on Monday.

Addressing the 15th annual insurance summit organized by the Confederation of Indian Industry, or CII, the Irda chief criticized the 24-player strong life insurance industry for launching one product after another without focusing on performance. Irda felt the industry should have only the market-linked products that can perform.

Incidentally, former capital market regulator C.B. Bhave had in a similar fashion criticized the mutual fund industry for merely launching products without really caring about their performances.

Alleging that the fund industry was serving only distributors and not investors by launching products with sub-optimal returns, the capital markets regulator had tightened the process of regulatory clearance for mutual fund schemes.

In the Rs.16 trillion life insurance industry, investments made in unit-linked insurance plans, or Ulips, are mostly invested in equity to maximize returns and, hence, like mutual funds, their performances are linked to the market.

“Today, products available in the market are designed in such a way that they build a certain corpus in a certain period. But, in reality, they have not been able to do that. Why can’t companies pick up the designs of only those products that are the best in the stable rather than launching one product after another?” Hari Narayan asked. “While clearing products, we will carefully examine whether the product design matches expectations.”

The insurance regulator also raised concerns about the absence of pension and annuity plans in the life insurance industry.

“LIC is the only player to have pension and annuity plans today. The concern is that by 2019, when a huge amount of money will be released out of NPS (new pension system), there will be a burden on the industry unless more life insurers get engaged in managing pension and annuity money,” Hari Narayan said.

The insurance regulator is also working on ways to improve the performance of insurance agents. Following this, certain categories of agents could be classified as senior agents. A discussion paper on this will be released shortly, inviting public comments.

The insurance regulator is also working on plans to amend certain other financial norms.

Soon after Hari Narayan’s address at the seminar, Irda released three investment-related discussion papers to allow insurers to participate as lender of securities in the stock lending and borrowing scheme of stock exchanges, participate in credit default swaps on corporate bonds market as well as reverse repo and repo in government bonds and corporate papers.

Irda also plans to move the industry to a risk-based solvency regime. The new solvency norms could be in lines of the Reserve Bank of India’s norms on risk-based assessment of assets. The norms, when implemented, could bring down the solvency margin, currently pegged at 1.5.

Solvency margin, a measure of financial health, is the amount by which an insurance company’s capital exceeds its projected liabilities.