Irda to bring out final investnment guidelines by next week

Sectoral exposure reduced to 15 per cent from present 25%

The Insurance Regulatory and Development Authority (Irda) will be coming out with the final guidelines for investment. According to sources, the final guidelines would be released in the next couple of days. The guidelines will put debt proportion for investment by insurance companies at 55% for insurance companies, down from the present 85%.
 
Officials dealing with this particular regulation said that the Irda would reduce the industrial sector exposure limit to 15% from 25% for investment assets, including unit-linked insurance plans (Ulips). Sectoral exposure would mean the company's total fund exposure to any particular secyor. This will curb investment in any sector of more than 15%, both for traditional and Ulip products.
 
Industry experts said that the above regulation would affect Ulip returns. The investment official of a private life insurer explained that this would mean that an individual wishing to invest in a highly performing sector in a market will not be allowed to do so, over and above the particular limit. This may, affect his returns, on a case-to-case basis.
 
However, the investment cap of 10% for investment in a single company will be retained. Sources added that Life Insurance Corporation of India (LIC) will be kept out of this specific provision. “The final regulation will be out by early next week,” an official said.
 
Further, insurance companies will be allowed to participate in additional instruments like interest rate swaps and equity derivatives.  Interest rate swaps refer to agreement between two parties where 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 it would have been able to get without the swap. Primarily, life insurance companies would be able to use it for hedging purposes.
 
Equity derivatives are derivative instruments with underlying assets based on equity securities.  An equity derivative's value will fluctuate with changes in its underlying asset's equity, which is usually measured by share price.
 
The insurance regulator has already mentioned that the total Investment in housing and infrastructure should not be less than 15% of the fund for life insurers and 5% for general insurers.
It is expected that investments in Infrastructure Debt Fund (IDF), as approved by the Authority, on a case to case basis shall be reckoned for investments in Infrastructure.
In its earlier draft, Irda has 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 SEBI (Credit Rating Agencies) Regulations.” This provision will hold in the final guidelines as well.