The Insurance Regulatory and Development Authority (Irda) would release the final guidelines on investment limits for insurance companies in the next couple of days, sources said. The guidelines would cap the debt portion of the investment by insurance companies at 55 per cent, against the current 85 per cent.
Officials dealing with the regulation said for investment assets, including unit-linked insurance plans (Ulips), Irda would reduce the exposure limit to a particular sector from 25 per cent to 15 per cent.
While industry experts said the regulation would affect Ulip returns, an investment official of a private life insurer explained said this would mean an individual who wished to invest in a high-performing sector, over and above a particular limit, would not be allowed to do so. This might affect his returns, on a case-to-case basis. However, the cap of 10 per cent for investment in a single company would be retained. Sources said Life Insurance Corporation of India would be kept out of the purview of the provision.
“The final regulation would be out by early next week,” said an official. Insurance companies would be allowed to participate in additional instruments like interest rate swaps and equity derivatives. Interest rate swaps are agreements between two parties in which one stream of future interest payments is exchanged for another, based on a specified principal amount.
These are used to limit or manage exposure to fluctuations in interest rates or to obtain a marginally lower interest rate than that possible without the swap. Primarily, life insurance companies would be able to use this for hedging purposes.
Equity derivatives are derivative instruments with underlying assets based on equity securities. An equity derivative’s value would fluctuate with changes in its underlying asset equity, usually weighed by share price.
Irda has already stated total investment in housing and infrastructure should be at least 15 per cent of the fund for life insurers and five per cent for general insurers.
It is expected investments in infrastructure debt funds, as approved by Irda on a case-to-case basis, would be considered for infrastructure investments. In an earlier draft, Irda had said, “No investment shall be made in instruments if such instruments are capable of being rated, but are not rated. The rating should be done by a credit rating agency registered under Securities and Exchange Board of India EBI (credit rating agencies) regulations.” This provision would be retained in the final guidelines.