What do the new insurance investment norms signify?
Aug 18, 2000

Author: PersonalFN Content & Research Team

The Insurance Regulatory and Development Authority (IRDA) on Thursday allowed the pension funds in the country to invest in non-SLR (statutory liquidity ratio) bonds. Only bonds and securities issued by Government of India (GoI) or guaranteed by GoI are considered as SLR investments. Banks and institutions have to maintain 25% of their investments in the form of SLR with the Reserve Bank of India.

The notification gazette issued on Thursday by IRDA stipulated that pension funds can invest up to 60% of their funds in triple `A' rated corporate bonds and securities. The remaining 40% can be invested in government and other approved securities. Meanwhile for the non-pension funds, the mandated percentage of investment has been retained at the same level as earlier except in case of categories like infrastructure and housing.

So what exactly do the new investment norms signify?
It means that investors in future can look at insurance as an attractive investment avenue, which is currently not the case. The new investment guidelines will enable the insurance companies to manage their funds more efficiently and in turn will offer better returns to policyholders. Currently the returns offered by pension funds are not in line with the market rate as pension funds in the country follow rigid investment norms.

The fact that pension funds are not allowed to invest in `AAA' rated corporate papers offering better returns vis-à-vis government papers, these institutions are not able to compete with other institutions offering better returns. Thus the pension funds are not able to sell their products as an `investment product'.

Investments by life and non-life funds in corporate bonds are expected to widen and deepen the Indian debt market. This in turn will also hasten up the introduction of `retail' products like Strips (separate trading of interest and principal of securities) as funds will flow into the debt market.

IRDA has also fixed a minimum investment of 15% in infrastructure and social sector while the balance 35% will be free for investment in the capital market.

In case of pension and general annuity companies, IRDA has stipulated a minimum 40% investment in government and other approved securities, of which not less than 20% must be invested in government securities.

The remaining 60% can be invested in other instruments. For general insurance, investment in government securities and other securities cannot be less than 30% with an additional investment in infrastructure and social sector pegged at not less than 10%. Atleast 5% of the total capital employed has to be invested in housing and loans to state governments for housing and fire fighting.

With the deregulation in the insurance sector, the prospective insurers see a vast untapped market for personal pensions in the country. Thus to ensure safety of returns to the insurers, the government will have to devise a suitable regulatory framework.