Low returns might keep insurers away

Removal of 10% cap gives flexibility, but returns are not high

Though the 10 per cent ceiling on insurance companies' investment in reverse repo transactions in government securities (G-secs) has been removed, it could take them some time to raise exposure in such instruments.

For, say insurers, there's opportunity for higher return from other investment avenues than in government bonds.

A reverse-repo transaction involves the buying of securities and lending of short-term surplus in the first leg and selling the security at a pre-determined rate in the second leg. As insurance firms lend money to banks and approved parties against G-secs, the transaction is called a reverse repo one.

Last week, the Insurance Regulatory and Development Authority (Irda) removed the exposure limit on such transactions by insurers. Irda had said such transactions in government securities would be treated at par with Collateralised Borrowing and Lending Obligation (CBLO) transactions and the 10 per cent investment limit was not applicable to this category.

Nirakar Pradhan, chief investment officer of Future Generali India Life Insurance, said removal of the limit was a welcome change. "We have been allowed another investment opportunity. This will give more depth to the market."

The time advantage is also a factor, said insurers. Being an over-the-counter transaction, they could customise the transaction as arranged between the parties concerned. On the other hand, they said, CBLO has a time restriction.

However, there would be no sudden investment strategy shift. Saravana Kumar, chief investment officer, Tata AIA Life Insurance, noted the returns under reverse repo in corporate bonds were higher.

The chief investment officer of a private life insurer said although Irda wanted this segment to grow, low returns had dissuaded them from high exposure in this segment.

Ajay Manglunia, senior vice-president, Edelweiss Capital, said: "Under the reverse repo, the rates are fixed but in the corporate bond repo, you can manually negotiate. As a result, insurance companies are hardly using the reverse repo window."

There is also the absence of short-term funds, due to which insurers looked at other instruments that gave better returns. The head of fixed income of a brokerage said insurance companies do not have huge short-term funds to park. If they have short-term funds, then they would probably go for short-term instruments, which give better returns than the 6.50 per cent in reverse repo.

In December 2012, Irda brought out a circular to permit repo/reverse repo in both Gsecs and corporate bonds, where an overall limit of 10 per cent of all funds was given. It later received representations that such limiting of these transactions in government securities would restrict the ability to generate optimal policyholder returns. Hence, they wanted reverse repo transactions to be treated at par with CBLO transactions.