Irdai working group recommends relaxing investment norms for insurers

A panel formed to suggest overhaul of the general insurance industry has recommended that insurers relax investment rules, such as permitting investment in Additional Tier-1 (AT-1) bonds of banks, removing the criteria of equity investments only in dividend yielding companies, and increasing investments in infrastructure sector through banks.

The panel’s report has been submitted to the Insurance Regulatory and Development Authority of India (Irdai), and is being reviewed by the regulator, said an official. The panel included representatives from Irdai and chiefs of non-life insurance companies.

The committee has suggested allowing insurers to invest in AT-1 perpetual bonds of banks that have declared dividend for the preceding two years, except in cases where the bank is a promoter entity of the insurer. AT-1 bonds offer higher return to the investors, and presently insurance companies are not allowed to invest in such instruments.

The committee comprised Anjan Dey, chairman and managing director (CMD) of Oriental Insurance; Ritesh Kumar, MD of HDFC ERGO General Insurance; Anuj Gulati MD of Care Health Insurance; V. Suryanarayanan MD of Cholamandalam MS General Insurance; A. Ramana Rao, general manager of Irdai; and Y. Srinivasa Rao, deputy general manager at Irdai.

The panel has also suggested that investments in long-term bonds for ‘Infrastructure and Affordable Housing’ should be removed from the overall limit of investment in banking, financial services and insurance (BFSI) as investments in infrastructure have no industry limit under the prudential exposure norms, according to recommendations of the committee reviewed by Business Standard.

It has also suggested removing the criteria for equity investments only in high dividend yielding companies. The panel has cited examples of some companies that are high dividend-paying, but have underperformed as compared to benchmark indices for years.

Allowing insurance companies to invest in companies that do not declare dividends but have high growth prospects would help them in getting institutional backing.

Restrictions on expenses
 

The panel has suggested having a single limit of expenses over and above the monitoring of solvency and enterprise level expense limit. This limit would include operating expense, commission, and rewards rather than separate limits of expenses at business level.

Prescribing a single limit for expenses will help insurance companies to manage their expenditure for fueling growth and for competing in the evolving market, the panel has opined. In cases where insurers breach the spending limit, they should be asked to maintain higher solvency.

It has also suggested solvency reforms by moving to a risk-based capital regime, and providing some relief to insurers in the interim. This includes limiting the impact of catastrophe claims, including Covid-19, to the first 12 months as against 36 months.

The insurance industry has settled Covid-19 claims of about Rs 24,000 crore as on March 31, according to estimates of the panel. With the extant regulations, these claims will have its overhang for three years until FY24 even as these claims have been settled and are not expected to recur, the panel observed. Inclusion of these claims will affect the solvency of insurance companies by 15-40 basis points, it said. Solvency indicates the health of an insurance company.

To make health insurance more affordable and accessible, the panel has suggested overhauling the goods and services tax on insurance policies.

It has suggested that annual premium up to Rs 20,000 must be taxed at the lowest tax slab of 5 per cent, and premium over Rs 1 lakh must be taxed at 18 per cent.

  

The Suggestions
 

Allowing investments in perpetual bonds of banks

Removing the condition of equity investments only in dividend yielding companies

Increasing investments in infrastructure and housing

Having a single limit for expenses over and above the monitoring of solvency and enterprise level expense cap

Limiting the impact of catastrophe claims including Covid-19

Overhauling GST to make health insurance more accessible and affordable