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C. Shivkumar

BANGALORE, May 9

INSURANCE companies, both in the public and private sectors have sought a departure from the existing system of mandated investments.

Sources said they had sought these relaxations from the Insurance Regulatory and Development Authority (IRDA) in a bid to improve their investment incomes. At present, investments are determined by the IRDA's guidelines.

The quantum of mandated investments in the banking sector itself (the statutory liquidity ratio) has been reduced to 25 per cent from a peak of 41 per cent in the late 80s.

Currently, at least 80 per cent of European insurance companies resources are invested in equities. In the US also there is greater allowance for investments in non-government sectors, in bonds and equities. The regulatory thrust internationally was to ensure that the solvency of insurers is maintained instead of regulating investments.

The sources said that there has been very little change in the investment guidelines since the private insurers entered the sector two years ago. Life insurers are still expected to invest a minimum of 25 per cent of their investible corpus in central government securities. Inclusive of sovereign guaranteed securities and public sector bonds, the minimum prescribed investments is 50 per cent.

Similarly, for the non-life sector the minimum prescribed investments is 20 per cent in central government securities and a minimum of 30 per cent in other guaranteed and state government securities.

Till about two years ago these investments fetched reasonably good returns (10-12 per cent) However with the slide in the yields, parking large volumes of resources in these categories of investments meant that insurers would have to forego substantial investment income.

The average coupons for the new categories of government securities are barely 6.25 per cent compared to about 10 per cent two years ago. This means that on the incremental premium flows, the insurers were actually investing at lower returns.

In fact average yield on investments for the public sector insurers was barely 8 per cent last year and on an incremental basis it was less than 7 per cent. It was the same for private sector insurers.

This was also one of the main reasons for the private sector's reluctance to offer endowment and savings-linked instruments to potential investors in insurers.

Private sector life insurers in fact have the bulk of their premium incomes from term plans, where the potential liabilities are low.

Private sector insurers are not interested in parking their funds only in government securities where yields are softening. If the premiums came from endowment policies, insurers would not be in a position to offer good returns, at the current level of G-sec yields, the sources said.

In fact, even LIC is quietly beginning to discourage investors from assured return schemes given the softening yields, as in the case of Bima Nivesh 2002, which was discontinued from March 31.

As for the general insurers, the sources said, falling investment incomes now implied that their ability to absorb underwriting losses had also considerably deteriorated.

In the past general insurers were in a position to absorb underwriting losses as high as 150 per cent.

This year, insurers have in fact fixed limits on underwriting losses, or claims ratios, which are closer to 70 per cent.

In fact, most of them have hiked premiums to offset losses from both investments and underwriting businesses.

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