Hybrid instruments issued by banks, like perpetual debt instruments and debt capital instruments, will now be included under the 'approved investments' category for insurance companies. |
Thus far, approved investments included all secured loans, secured debentures other debt instruments issued by all-India financial institutions, deposits with banks, collateralised borrowing and lending obligation, treasury bills issued by the Reserve Bank of India and so on. |
The Insurance Regulatory and Development Authority of India (Irda) has stated that insurance companies, in general, have long-term liabilities and require instruments of investment with matching maturities to optimally manage their assets and liability position. |
The Reserve Bank of India has allowed banks to raise capital through issue of hybrid instruments for augmenting their capital adequacy. |
These include innovative perpetual debt instruments for inclusion as Tier 1 capital, debt capital instruments eligible for inclusion as Tier 2 capital, perpetual non-cumulative preference shares for inclusion as Tier 1 capital and redeemable cumulative preference shares eligible for inclusion as Tier 2 capital. |
The aforesaid instruments would have a minimum maturity of 10 to 15 years, and would provide adequate flexibility to insurers in their asset-liability management, with reasonable returns. These, therefore, provide insurance companies with appropriate investment opportunity. |
However, there are certain conditions that insurance companies will have to comply with before investing in these instruments. |
For instance, debt instrument issued by banks in private sector will need to have a minimum of AAA rating by an independent and recognised rating agency and those issued by banks in public sector will need to have at least AA rating. |
Also, in the case of a life insurer, investments in various hybrid instruments will at all times not exceed 10 per cent of investment in approved category which are subject to exposure norms (3.5 per cent of life fund) and not more than five per cent of respective fund size of other than life fund, such as pension, general annuity and unit linked funds. |
In the case of non-life insurers, all investments in such hybrid instruments will at any point of time not exceed 10 per cent of investments under approved investments which are subject to exposure norms (5.5 per cent of investment assets). |
This apart, in case the interest on the instrument is not serviced on due dates, the investment in such hybrid instruments will be re-classified as 'other than approved investments'. |