| A working group on investment regulations constituted by Insurance Regulatory and Development Authority (IRDA) in June 2006 has also recommended insurers be allowed to invest in equity derivatives for hedging purposes and include a debenture or a bond with AA+ or above rating in the list of approved investments. The Insurance Act 1938 allows insurers to invest only in secured debentures, a provision inserted in an era when the concept of rating did not exist. |
| The current investment norms allow insurance firms to invest up to 35 per cent of policyholders' funds in approved securities, which include government bonds but not mortgage-backed securities. Mortgage-backed securities are instruments with a pool of housing loans as the underlying assets. |
| The process of a bank or a non-banking financial company (NBFC) selling part of its portfolio to a trust which in turn issues securities backed by the loan assets is known as securitisation. Such securities backed by home loans are known as mortgage-backed securities. |
| Investments in these securities are currently classified as "other than approved investments". Insurance firms can invest up to 15 per cent of their funds in other investments. |
| "Mortgage-backed securities provide better yields and are long term investments. If mortgage-backed securities are considered as approved investments, it will impove the quality of securities in approved investments," said an insurance official involved in the working group. |
| Another key recommendation made by the working group is to allow insurance companies to invest in equity derivatives for hedging purposes besides changing the terminology for "Other Than Approved Investments (OTAI). The Group said that 'Other than Approved Investments' is a negative connotation and the terminology should be changed to 'Other Investments.' |
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