Insurance Regulatory and Development Authority (IRDA) has said that insurers demand to lower the bar on quality of debt papers they can invest is not justified.
Earlier insurers have said that there are not enough quality debt papers available in the market for them to buy hence; debt investment norms should be relaxed. Life Insurance Corporation of India (LIC) had recommended that they should be allowed to invest in lower rated papers such as AA owing to unavailability of good quality debt papers.
But a study conducted by IRDA with rating company Crisil found that there are enough debt papers available for the next five years hence, there is no need to change investment norms. IRDA also said that that insurer’s claim that there are not enough AAA rated papers is a bluff. There is no need to change norms around government securities.
IRDA had set up a committee to examine the option to include government securities in AAA-rated papers, as a part of exercise to amend the insurance act.
At present insurers are allowed to invest 50% in government securities, 15% in infrastructure bonds and remaining 35% in other investment grade corporate bonds and equities. A minimum of 75% debt instruments should carry AAA rating.
If government securities had been included in AAA rating category it would have given insurers option to take additional exposure in non-AAA rated securities including A+ and A rated papers, by taking board approval. It could have helped insurers to generate better returns for policyholders, as lower rated debt papers yield high returns.
The rating assigned to a bond by credit-rating agencies indicates its issuer’s degree of creditworthiness and ability to meet financial commitments. Bonds rated AAA, the highest possible rating, are perceived to have little risk of default and it offers its investors lowest yields among bonds of comparable maturity.
As of March 2012 life insurers had Rs 9, 53,052 crore investments in fixed income instruments.