Insurance companies may have to set a minimum rate of return for each category of debt instruments they invest in.
The finance ministry has insurance companies to provide the details of total debt portfolios, with respective returns on categories like government securities, corporate bonds and state government loans. The insurers would also have to provide the details of total debt investments during the last financial year and the returns provided.
The move is aimed at reducing the difference in the rates of returns provided by different insurers, while investing in the same debt instruments. According to sources, the ministry also wants to know whether insurance companies provide similar returns for products where returns are benchmarked against government securities.
“In equity investments, one cannot guarantee a return. But debt investments are secured and there are benchmark returns on each category of debt instruments. Hence, insurers should provide a minimum benchmark return from debts,” said D K Mittal, financial services secretary, ministry of finance.
Currently, insurance companies have to submit returns from debt investments to the insurance regulator for guaranteed returns products and endowment products.
“In some cases in which a significant portion is invested in government securities instruments, the rate of return varies between insurance companies by 200 basis points. We have asked the Insurance Regulatory and Development Authority (Irda) to source data from each insurance company,” Mittal told Business Standard.
According to investment norms defined by Irda, insurance companies are mandated to invest at least 25 per cent in central government bonds, 25 per cent in other government securities and 15 per cent in infrastructure bonds, taking the total investments in debt to 65 per cent of the total investment corpus. Hence, insurance companies can invest in equity only to the extent of 35 per cent of the total corpus.
Insurance companies can also participate in the overnight debt-like market repo, collateralised borrowing and lending obligations or short-term instruments like commercial papers issued by companies and certificates of deposits issued by banks, provided the total fund exposure to a single company does not exceed 10 per cent.
“The returns on debt investments vary from one insurer to another, depending on when and which instrument the company invested in,” said a senior official of a life insurance company.
The investment limit also depends on product categories. For instance, in the case of traditional plans, life insurance companies have to invest at least 75 per cent of the corpus in debt instruments, while the remaining portion can be investment in equities. For unit-linked insurance products (Ulips), there is no such cap, but depending on the customer's instruction, the exposure in equity can go up to 100 per cent.
Over the last one year, a surge in sales of traditional plans and a choppy equity market have led to insurers being forced to increase their exposure in debt. Since September 2001, when stringent norms on unit-linked guidelines came into effect, insurance companies started focusing on traditional plans while the sale of Ulips, which constituted nearly 80 per cent of the total volume, declined drastically. During the April-July period, life insurance companies collected Rs 26,794 crore by writing new policies, and traditional plans accounted for nearly 80 per cent of these.
