Indian insurance firms seek zero-coupon bonds to manage long-term risks

By Bhaskar Dutta and Saikat Das

 

Indian insurers have asked the government to issue new sovereign debt instruments, including zero-coupon bonds, to broaden investment opportunities available to them, according to people familiar with the matter. 

Insurance companies have made a request to the Reserve Bank of India, which has then discussed the matter with the Finance Ministry of the government, said the people who asked not to be identified as the information is private. 

 

Zero-coupon bonds could help insurance companies better manage their long-term liabilities, as they step up offerings of guaranteed savings products.

 

India’s bond market, traditionally dominated by banks, is evolving as cash-rich insurers drive demand for a wider variety of securities and derivatives. Insurance firms have sought the issuance of 20- and 30-year zero-coupon bonds, the people said. 

 

 

The RBI and the finance ministry did not respond to Bloomberg’s emails seeking comments.

 

Zero-coupon bonds protect investors from interest-rate and reinvestment risks as they don’t provide periodic payouts. Investors buy them at a discount and receive the full face value at maturity. 

 

Insurance companies have also asked the government to issue partly-paid bonds, the people said. It’s a debt instrument where the bond is partly bought by investors at issuance, while the remaining balance is purchased in installments over a pre-defined schedule.

 

While the Separate Trading of Registered Interest and Principal of Securities, or STRIPS, facility does allow insurers to buy bonds with features similar to zero-coupon bonds, it requires intermediaries, which adds to costs, the people said.

 

The government has responded favorably to insurers’ requests in recent years, such as introducing bonds of 50-year maturity. However, issuing zero-coupon bonds could pose accounting challenges. 

 

Though these bonds would not add to the government’s budget deficit during their tenure, repayment obligations would surge upon maturity, potentially inflating gross borrowings, the people said.