IRDA draft guidelines provide greater investment freedom to insurers

The Insurance Regulatory and Development Authority (IRDA) has released three draft guidelines that aim to to give greater freedom to life and non-life insurance companies to participate in money market operations, reports PTI.
The guidelines cover participation of insurers in repo (borrowing) and reverse-repo (lending) operations across government securities, corporate debts, corporate default swaps (CDS) and securities lending and borrowing (SLB) schemes.
IRDA has called for comments from stakeholders within 15 days on the issue of guideline, which are expected to help insurers earn money from treasury operations.
Under the guidelines, insurers are required to have in place a mechanism for risk management and formulation of policies for undertaking such investments.

As per the draft norms applying to repo and reverse operations,  the exposure of a life insurance company in the reverse-repo (lending) in corporate debt securities should be restricted to 10 per cent of the controlled funds.

For non-life insurance companies the limit in reverse and reverse-repo operations has been pegged at 10 per cent of investment assets.
The tenure of repo transactions, it added, would be for 180 days, with prior approval of the investment committee of the insurance company.
Further the IRDA said, insurance companies would be allowed to undertake repo and reverse operations only in AAA- rated corporate debt securities.
As a precautionary measure, the IRDA has clarified that insurers would be barred from undertaking such operations in debts of promoter group companies.

According to the IRDA, the board of insurers would be required to incorporate necessary guidelines in their investment policies pertaining to credit rating, exposure and tenor of collaterals.
Regarding participation of insurers in the SLB operations, under the draft norms such insurers would be permitted to "lend only up to 10 per cent of their total equity holdings" in such operations.
"Equities lent in SLB would not be treated as if the insurer owned such equities and all benefits arising on such equities shall be available to the insurer i.e. the beneficial rights of the insurer shall continue," it said.

The draft added, the board, would need to amend its Investment Policy and put in place adequate Risk Management framework on SLBs.
IRDA has also proposed that insurers participate in CDS on Corporate Bonds market as "users" (protection buyers).
"The CDS would be permitted as a 'hedge' to manage Credit Risk... mandatory rating for both the issuing company and the Referenced Entity shall be prescribed by the board of the insurers," it said.

It added that no CDS transaction could happen between entities of the same promoter group.
Additionally, it directed that "All CDS transactions shall be reported to the Investment Committee, Audit Committee and to the Board on a Quarterly periodicity".