Easier Investment Norms For Insurance Firms To Be Eased Further

The investment norms of the Life Insurance Corporation (LIC) and the General Insurance Corporation (GIC) are to liberalised further to facilitate lending to infrastructure projects.

Official sources said here that these amendments will be incorporated in the Life Insurance Corporation of India Act of 1956 and the General Insurance Act of 1938, and will be taken up in the next few months.

At present, investment norms for insurance companies are specified by the finance ministry. The proposed amendment, however, does not involve complete deregulation, but would allow for a relaxation in the norms for making funds available for infrastructure financing.

This proposal aims to route at least 50 per cent of the infrastructure financing requirement from insurance companies. These norms, the sources said, would be applicable to private sector insurance companies for which the government is working out the policy framework.

"The investment norms for LIC and GIC are constantly under review and changes are made periodically. This is an ongoing process as part of the insurance reforms," a finance ministry official said.

Currently, 55 per cent of the funds collected by the insurance companies by way of premia are to be invested in designated government securities.

This investment is entirely in special securities, gilts and other notified securities. The remaining is permitted to be invested in public sector bonds, private sector securities, which include equity and term loans or debentures..

The investments in government securities are intended to meet the liquidity norms of insurance companies and sudden claims from policy holders.

The investments in term loans and equity are intended to improve the average realised yield on investments of the insurance companies.

The sources said that the investment norms do not provide flexibility for investment in private sector infrastructure projects, especially roads, urban water supply and other core sector areas. Insurance companies, however, are big lenders to urban bodies, including metropolitan development authorities and municipal development corporations mostly with state government guarantees.

The amendments are to enable these institutions to provide low-cost, long-term funds for development of roads and other urban projects. Currently, almost all the companies involved in infrastructure development rely on banks or institutions like IDBI, ICICI, IFCI and IDFC for their funds requirements. The disadvantage with such funding sources is that they are often faced with asset liability mismatches.

Consequently, these institutions have evolved methods with built in early exit mechanisms which does away with the need to recall the loan before maturity. However, such methods have resulted in cost escalation.

Insurance companies have traditionally had a longer gestation corpus of investible funds. and do not suffer from such disadvantages of asset-liability mismatches. Besides, lending to infrastructure companies also allows the insurance industry to realise better yields on investments. Currently, the average yield on investments in industry is about 12.5 per cent.

This is one of the sources of income for the insurance.