Insurance companies are all set to get the freedom to invest more in the equity and debt markets following a comprehensive overhaul of the investment regulation norms.
According to a source close to the development, the investment advisory committee of the Insurance Regulatory and Development Authority has suggested far-reaching changes to make the investment norms more flexible, while adhering to the existing prudential investment guidelines.
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At present, an insurance company has to invest 85 per cent of its total portfolio in government securities and other approved securities, and its board is free to decide where to invest the remaining 15 per cent.
According to the recommendations of the investment advisory committee, insurance companies will be given more freedom in deciding the discretionary investments. These investments are made in initial public offers of companies and venture capital funds, among others.
The committee has suggested that while the board can lay down the broad investment policy, the investment committee of an insurance company can take independent decisions without getting the prior approval of the board. A meeting will be held next week to finalise and then notify these recommendations.
At present, of the 85 per cent investments in government securities and approved investments, 50 per cent have to be in government securities. Out of this, 5 per cent is earmarked for gilt funds.
The committee has advised to raise this limit to 10-15 per cent so that insurance companies can invest in liquid instruments. Gilt funds are managed by asset management companies where the money is invested in short-term money market instruments.
In order to channelise more funds from the insurance sector to infrastructure development, insurance companies will get to invest more in instruments floated by infrastructure developers without bothering about collateral or their record of interest payments.
At the moment, insurance companies can invest in any instrument like a mortgage-based security or commercial paper as long as it is rated well. They can also invest in instruments floated by special purpose vehicles for infrastructure investments.
Under the new norms, insurance companies will be able to invest in equity or fixed-income derivatives only for hedging their portfolio and not for trading purposes. Even with limited corpus, investments in the equity market are substantial by insurance companies.
Moreover, the definition of infrastructure for insurance companies will be aligned with that for banks. Thereby, charitable firms and educational institutions could be taken out of infrastructure investments while retaining the housing sector.
While the investment norms are being relaxed, those for unit-linked products will be tightened so that the risk management is done not only by the customers but also by the company.
Therefore, the new norms might cap the group and individual exposure norms for the ULIP products when the investments are being made in the instrument of certain companies or institutions as in the case of other insurance products. This is to mitigate the concentration of risk arising out of ULIP investments in a few companies.
