Soon, insurers will have to monitor firms they invest in

Insurers will soon have to monitor key business parameters, such as financial performance and corporate governance, of the companies in which they invest.

They should also set out the circumstances in which they will actively intervene, if the need arises, and regularly assess the outcome of this monitoring, according to the Insurance Regulatory and Development Authority of India (IRDAI).

These guidelines are part of a new stewardship code, which is to be introduced by the regulator and adopted by insurers as institutional investors.

“The principles are intended to strengthen the role of insurers as stewards on behalf of the policyholders,” IRDAI said in a circular.

The stewardship code assumes significance in view of the significant increase in the funds of insurance companies. While not specifying the quantum of investments in an entity that makes an insurer eligible to intervene, the authority says: “A low volume of investment is not, in itself, a reason for not intervening.”

The existing investment norms permit an insurer to invest only up to 10 per cent stake in a single entity. The total accumulated investments made by the insurance sector was at ₹26,90,194 crore as on March 31, 2016, with likely growth of 10 per cent by March 2017.

Life insurers account for 93 per cent of the total investments made by industry.

The investments are made in traditional areas, such as government securities, housing and infrastructure. The other category includes unit-linked insurance plans (ULIPs).

There is increased emphasis on governance of public companies under the corporate and insurance laws and the role and responsibility of boards of companies have expanded.

The policy should clearly define the stewardship responsibilities as identified by the insurer and how it intends to fulfil the same to enhance the wealth of its clients.

For issues that require larger engagement with the investee company, institutional investors may choose to act collectively in order to safeguard the interests of their investors.

“Adoption of the principles will improve the confidence of the policyholders in the insurers and also ensure better corporate governance and decision-making at investee companies,” the IRDAI said.

Once finalised, the insurers will have to put in place a policy based on the principles and get it approved by their respective boards.