IRDA hikes cap on exposure to group cos from 10% to 25%

HYDERABAD/MUMBAI: Insurance companies will henceforth have the freedom to diversify their investment portfolio in stocks of corporate groups. The Insurance Regulatory Development Authority (IRDA) has decided to raise the existing cap of investment in a group companies from 10% to 25%. Similarly, insurers will also be allowed to have an exposure of 25% in a single industry sector against the earlier norm of 10%. The new cap will apply to all insurance products—ranging from traditional insurance products to Unit Linked Insurance Products, said IRDA chairman C S Rao.

The exposure in the stock of a single investee company will, however, continue to be capped at 10%.This means an insurance company can invest only up to 10% of its portfolio in the stock of a single company, say in the software sector. But if an insurer is bullish on stocks of group companies of this software firm, he can now invest an extra 15% of the portfolio in them. Similarly, the new norms will also enable insurers to take an extra exposure of up to 15% in the stocks of companies in a specific sector. This means the insurer can invest in, say, shares of more companies in the software sector, if they are upbeat about it.

The new caps will form a part of the new investment regulations to be notified shortly. An overhaul of the investment regulations was approved by the IRDA Board in March, this year. They have now been re-worked to curb over-regulation and give more flexibility to insurance companies to diversify their portfolio.

The Board has also approved bringing prudential norms for LIC on par with private insurers. LIC enjoyed the freedom to invest up to 30% of its portfolio in a single investee company as against 10% for private insurers. This enabled the Corporation to pick up over 27% in Corporation Bank.

The new norms are reckoned to be more stringent than Sebi’s norms for a mutual fund scheme. Going by Sebi’s norms, a mutual fund scheme cannot hold more than 10% its assets under management in the shares of a single company. There are also limits on how much one can invest in a promoter group company (that is companies that belong to the same promoter as that of the AMC.) But unlike insurance products, there are no limits on investment in a corporate group or that pertaining to industry sector exposure.

The IRDA has also allowed insurers to invest up to 10% of their portfolio in new instruments such as mortgage-backed securities (MBS). MBS are structured loan instruments where cash flows from home loans are pooled together and converted into marketable securities. The investment in these instruments will be subject to industry sector norms.

Exposure norms have also been made mandatory for Ulips that are similar to mutual funds in design with an added insurance cover. This has been done to mitigate possible risks arising from investments in a few companies. The investment norms for insurers are stipulated in the insurance legislation. Now, an overhaul has been made without taking recourse to legislative amendments. Currently, life insurance companies are allowed to invest 50% of their investible assets in government and other approved securities. Additionally, they can invest at least 15% in infrastructure instruments that qualify as approved instruments.

Insurers hold a discretionary control, subject to conditions, on the balance 35% of the assets. Of this, ‘other than approved’ investments cannot exceed 15% of assets. Non-life companies can invest 30% of their portfolio in government and other approved securities. They can invest at least 10% in infrastructure and 5% in housing. The balance 55% is the discretionary quota, which includes investment of up to 25% in the ‘other than approved’ category. This category will henceforth be known as ‘other investments’.

Source: Economic Times/5 May, 2008