Make provisions for beleaguered IL&FS exposure: Irdai to insurers

The Insurance Regulatory and Development Authority of India (Irdai) has asked insurers to make provisions for their exposure to the beleaguered IL&FS group because the write-off option is not there.

They have to make provisions because those exposures cannot be written off, Irdai Chairman Shubash Chandra Khuntia said on the sidelines of the release of the handbook on general insurance on Thursday.

The regulator in September last year had asked insurance companies to declare their exposure, both equity and debt, in the IL&FS group.

Moreover, the Irdai chairman had cautioned insurance companies on the risks associated in investing in low-rated debt instruments. The Irdai has issued norms for provisioning sub-standard assets. Under write-off, the company eliminates assets from the books while provisioning maintains that asset on the books and creates a provision on the liability side, said Kedar Patki chief financial officer, IDBI Federal Life Insurance.

While norms set the minimum requirement for provisioning, companies may take a more conservative view and provide for more than what is required by regulation, Patki added. Some IL&FS group entities defaulted on debt repayments, which caused a liquidity freeze in the non-banking financial company (NBFC) sector in September last year. 

The company is sitting on a debt of more than ~90,000 crore. Life Insurance Corporation is the largest shareholder in the IL&FS group, holding 25.34 per cent. The erstwhile senior executives of the company have been dragged to the National Company Law Tribunal by the ministry of corporate affairs over allegations of mismanagement.

Among private insurers, IDBI Federal Life Insurance has an exposure of ~20-25 crore to the IL&FS group.

It is not accurately known how much insurance companies have exposed themselves to the IL&FS group. Khuntia also expressed concern over commissions insurance companies pay motor insurance service providers (MISPs) because they were higher than what the regulator stipulated.

“Whenever it is coming to our notice, we are taking action. We have also done some focused inspection of MISPs, and we are watching the market very carefully for violations,” Khuntia said. 

The regulator had expressed concern last year that original equipment manufacturers (OEMs) were exercising undue influence both on the insurance intermediary and automobile dealers who have become MISPs without accountability. Also, they had capped the payments made by insurers to agents and dealers of cars and two-wheelers and brought them under its regulatory framework as MISP. 

Khuntia said, after the GST on third party insurance was reduced to 12 per cent from 18 per cent, the regulator was in consultation with the GST Council on reducing the tax rate on property insurance in vulnerable areas.

Khuntia also touched upon the mis-selling aspect of the insurance business and asked industry players to devote more time to underwriting products. He asked insurers to speed up the claim settlement process. 

As the non-life space is under-penetrated in India, the chairman expressed hopes that cyber security insurance would be a big opportunity for general insurers in the future to capitalise on.