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Life insurers may get credit swap window

BS Reporter / Mumbai 07 Aug 12 | 12:24 AM

In a bid to give more options in long-term investments and to hedge interest rate risks for life insurance companies, the Insurance Regulatory and Development Authority (Irda) has proposed to allow these firms to participate in credit default swaps (CDS), security lending and borrowing (SLB), and the repo and reverse repo market.

In draft guidelines for such options, it said CDS would be allowed to hedge against credit risk and insurers should abide by Reserve Bank of India guidelines for CDS on corporate bonds.

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“The insurers would act as users or protection buyers of CDS. The board of the insurer shall amend its investment policy and put in place a necessary risk management framework in this regard," the draft said.

  • CDS would be allowed to hedge against credit risk
  • Insurers would abide by RBI guidelines on CDS
  • Insurers could lend up to 10 per cent of their total equity holdings under SLB
  • SLB scheme of NSE and BSE should be based on guidelines issued by Sebi
  • Exposure to reverse repo transactions should not exceed 10 per cent of the total fund size
  • Tenor for repo transactions should be maximum of 180 days

Similarly, under the SLB scheme, based on guidelines issued by the Securities and Exchange Board of India (Sebi), the capital markets regulator, a company would be allowed to lend up to 10 per cent of total equity holdings. Also, life insurers may participate in reverse repo and repo transactions in government securities and corporate debt securities from time to time. For life insurers, exposure to reverse repo transactions should not exceed 10 per cent of the total fund size and the tenor for repo transactions should be a maximum of 180 days.

“There is a shortage of assets to match the guarantees embedded in the liabilities and the need to have instruments to hedge mis-matching risk of insurance liabilities," said J Hari Narayan, chairman, Irda, while addressing the media on the sidelines of a semimar.

New product guidelines
Meanwhile, the expected new guidelines for traditional products will be applicable from only the next financial year and insurers will get sufficient time to refile, said Sudhin Roy Chowdhury, member (life), Irda.

Irda is set to increase the 10 per cent equity exposure cap for Life Insurance Corporation of India (LIC), the largest in the segment. “We are considering it. LIC is an important institution and we have set up a committee to look into the matter. There will be an appropriate regulation later," Hari Narayan said.

At present, LIC can invest up to 10 per cent of the capital employed by the investee company or 10 per cent of the fund size in a corporate entity, whichever is lower. The capital employed includes share capital, free reserves and debentures or bonds. Ever since the 10 per cent cap came into force in 2008, LIC, the largest domestic institutional investor in the country, has been lobbying for this relaxation, as it had exceeded the 10 per cent limit in various blue-chip stocks.

The move would allow LIC, which has plans to invest Rs 40,000 crore in equities in the current financial year, to invest in a host of corporate biggies such as Tata Steel, ITC, L&T and State Bank of India, among others, where it already holds more than 10 per cent stake and has been stopped from raising these. Besides, in the backdrop of the pending disinvestment target of the government, the finance ministry is also trying to push the issue.

The Irda chairman added the regulatory body was considering giving a risk-weighted assessment on assets and liabilities of insurance companies, to help these bring down the solvency margin below the present 150 per cent and provide more cushion to insurance companies.

Expressing concern on the absence of pension and annuity products in the market, he said, “LIC is the only player to have pension and annuity plans today, of the 23 life insurers in India. The concern is that by 2019, when a huge amount of money will be released out of the NPS (New Pension Scheme), there will be a burden on the industry unless more life insurers get engaged in managing pension and annuity money."

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