Risk charge on debt papers not to affect insurers' appetite

Majority of funds need to be invested in govt securities, approved investments. No risk charge is imposed on insurers who invest in riskier instruments

Despite the insurance regulator proposing risk charge for debt instrument across all rating grades, except state and central government securities, the insurance companies will continue investing in those instruments due to attractive returns and keep their investment portfolio diversified.

Last week, Insurance Regulatory and Development Authority (Irda)—for the first time—had proposed a risk charge for debt instruments ranging from AAA rating to Unrated ones.

According to the Irda (Investment) Regulations 2000, majority of funds need to be invested in government securities and approved investments and no risk charge is imposed on insurers who invest in riskier instruments.

Nirakar Pradhan, chief investment officer of Future Generali India Life Insurance said that while move will standardise practices in the industry, but added that quality of the investment would improve and there would be no changes in their asset side.

"The immediate need is felt to define the risk charge on the debt instruments and loans and advances of the insurers to address the spread risk on various categories of debt instruments," said Irda in the exposure draft. In line with these concerns, the regulator has proposed a total capital charge ranging from 0.9% to 7.5% based on the rating of the instrument, with lower rated instruments having a higher risk charge.

Other life insurers will continue their investment, while taking some discretion on a case-to-case basis. A K Sridhar, chief investment officer of IndiaFirst Life Insurance said that the charges would not have any impact on their investments in debt instruments. "We will continue our investments in bonds across all grades. However, we will take a decision on a case-to-case basis," he said.

Insurers invest in debt instruments including central and state government securities and others rated by various rating agencies. This mix is reviewed from time to time, by the investment departments of the companies and allocation to different debt instruments is altered appropriately.

General insurers are also taking a similar view, in terms of debt instruments. According to N Sampath Kumar, chief financial officer of Bharti AXA General Insurance the Irda proposal would not deter them from investing in all grades of debt instruments.

Kumar also added that they needed clarity on other instruments like fixed deposits and their rating and hence they would need some clarification on these issues from Irda. Industry players also opined that the charge structure was nominal and would not have any significant role to play in deterring companies from opting for investment in lower rated bonds.

Public general insurers, however, are taking a conservative approach. While only some of the four public general insurers invest in lower rated bonds, others said that they would stick to their strategy.

"Irda proposal for risk capital charge is insignificant as we are not looking to invest in lower rated bonds, for the time-being. We will review the situation in a few months and then take a final call," said a senior official from a public general insurance company.