IRDA (INVESTMENT) REGULATIONS, 2013 :
In a bid to direct long term savings in infrastructure sector, Insurance Regulatory Development Authority (IRDA) amended investment regulations in Year 2013. These guidelines provide for the following:
Types of investments (based on nature of investments)
The objective behind this classification is to categorise the investments based on the avenues where investments are made and place a ceiling (cap) or floor (minimum) depending on the type of investment. Investments of insurers are categorised into the following buckets:
(a) Government Securities – these are predominantly Securities issued by Central Government or State Government which have a sovereign rating and carry a Very high safety
(b) Securities include securities issued by an authority constituted under a Central or State Legislature or by a Corporation
(c) Approved Investments are controlled investments which satisfy any of the conditions mentioned in Section 27A (for Life) and 27B (Non-Life) of the Insurance Act. Further, IRDA have also specified additional investments as “Approved investments” under the Regulations
(d) Other investments – these are investments which are ‘other category of investments’, other than the ones specified above and which are not prohibited investments
(e) Prohibited investments – investments in Private Limited Companies and investments out of Policyholders funds outside India
Investment categories based on type of business
Investment assets of an insurer have broadly been classified as follows for the purpose of regulating investments:
(a) Unit reserves of unit linked business – These constitute the reserves against the units of a unit linked insurance business which are dependent upon the investment pattern chosen by the Policyholders. Hence these investments are classified separately
(b) Pension & Annuity business – Pension & Annuity business are relatively long term in nature and guarantee annuity over a fairly long period of time and hence requires to be treated differently. Group business other than unit linked and One year Renewal Group Term insurance also fall under this category.
(c) Life insurance business – this is the residual category which comprises of :
1. Shareholders’ funds representing solvency margin
2. Participating and Non-participating Policyholders funds
3. One year Renewable Group Term Insurance
4. Non-unit reserves of unit linked insurance business
For a Non-life insurer (including Health business), there is only one category of investible funds – which includes both shareholders funds and policyholders funds
Prescription of floor and ceiling for investment categories (based on type of business)
(a) For unit reserves of unit linked business – the investments are required to be made in such forms of instruments in such proportion as per the pattern of investment for the fund selected by the Policyholders. However, atleast 75% of the investments made as per the pattern shall be in such instruments which belong to “Approved investment” category
(b) For Pension & Annuity business – a minimum of 40% of the funds in this category will have to be invested in Central government, State government or other Approved Securities (out of which 20% shall be Central Government Securities). At the same time not more than 60% is allowed in Approved investment categories. Investments in “Other investments” prohibited for Pension & Annuity business
(c) For Life insurance business (other than (a) and (b) above) :
Out of the total funds in this category of business:
Mandatory investments:
a. a minimum of 50% to be invested in Central or State Government or Approved Securities (out of which 25% shall be Central Government Securities)
b. a minimum of 15% to be invested in Housing & Infrastructure investments
Optional investments:
a. upto 50% allowed in Approved investments
b. upto 15% allowed in “Other Investments”
Note: The pattern of investments is not applicable for Shareholders funds held in excess of the solvency margin, provided they are kept separately and based on an Actuarial certification filed with the Authority and provided the Shareholders funds held to support solvency margin are invested as per the investment pattern as above.
Housing & Infrastructure Investments
Bonds or debentures issued by HUDCO or National Housing Bank or Housing Finance Companies accredited by the Bank for housing finance activities or carrying Government guarantee of a rating of not less than AA only would qualify. If an Asset backed Security is backed by an underlying housing loan which satisfies the above condition, such a Security would also qualify under this category.
If a Central or State Government Security is issued to specifically meet the needs of a sector falling under infrastructure facility, such a security shall qualify for the purpose of investments in “Housing and Infrastructure” investment category
All investments in Approved investments and “Other Investments” shall be subject to Exposure and Prudential norms, including housing and infrastructure investments.
Investment Controls Based on Rating of Instruments
A credit rating evaluates the credit worthiness of a debtor, especially a business (company) or a government. It is an evaluation made by a credit rating agency of the debtor’s ability to pay back the debt and the likelihood of default.
As a general rule, no investment can be in an instrument which is capable of being rated, but is not rated for some reason. Also, the rating must be done by an authorised Credit Rating agency under the SEBI Regulations.
Classification as Approved Investments Based on Rating
The following investments shall be classified as “Approved investments” based on Credit rating as follows:
| Sr. No. | Nature of Security | Credit rating | Type of investment/ Category recognised | Remarks |
| 1 | Corporate bonds or debentures | Minimum ‘AA’ or equivalent | Approved investments | Nil |
| 2 | Short term bonds, debentures, Certificate of deposits, Commercial papers | Minimum ‘P1’ or equivalent | Approved investments | Nil |
| 3 | Debt instruments issued by All India financial institutions | Minimum ‘AA’ or equivalent rating | Approved investments | If investments in ‘AA’ not allowed, ‘A+’ allowed with Investment Committee approval |
Minimum and maximum investments based on Credit rating
(a) Minimum investments in ‘AAA’, Sovereign or ‘P1’ rating for Debt instruments
A minimum of 75% (65% in the case of non-life) of Debt instruments (including Government and Approved Securities) shall be invested in instruments with sovereign rating or ‘AAA’ or equivalent for long term and sovereign debt and ‘P1’ or equivalent for short term instruments. For unit linked business, at each segregated fund level, the above condition must be satisfied. Investments in Reverse repo backed with underlying corporate bonds, Fixed Deposits, Promoter group Mutual Funds and unrated Mutual Funds must not be considered while calculating the above percentage.
(b) Maximum investments in ‘A’ or below for Debt instruments
A maximum of 5% (8% in the case of non-life) of Debt instruments (including Government Securities and Approved Securities) can be invested in instruments having a rating of ‘A’ or below or equivalent for the long term, out of life insurance fund and unit linked fund for a life insurer (and overall funds of a non-life insurer). However, no part of the Pension and Annuity Fund of a life insurer can be invested in such instruments.
In other words, while investments in long term debt instruments in ‘AAA’ rated shall be 75% in each category of investments, investments in debt instruments rated ‘A’ or below cannot be more than 5%, which meansthe remaining 20% is required at the minimum to be rated between ‘AA+’ to ‘A+’. The rating of the remaining 20% has to be decided keeping in mind the overall limit of 15% for investments in “Other investments” out of Life insurance funds.
In respect of short term debt securities, not less than 75% shall be invested in securities rated ‘P1+’ and above while short term corporate bonds and debentures rated ‘P1’ and above shall be rated as ‘Approved investments’. This would mean that short term debt securities rated less than ‘P1’ cannot exceed 15% (limit for ‘Other investments’).
Listed equities – investments only in “actively traded scrips”
All listed equity investments to be made only in those securities which are actively traded in stock exchanges, i.e. other than ones which are classified as “thinly traded” as per SEBI Regulations
Investment controls based on Exposure norms
These norms aim to control the investment risk by limiting the exposure to the Company where the funds are invested, limiting the exposure to a Group of companies to which the Investee company belongs to and also limits the exposure to one industry. This follows the golden principle “do not put all your eggs in one basket”.
Exposure norms are applicable to all the three investment categories based on the types of business given above and shall be calculated for the following types of investments:
(a) Approved investments
(b) ‘Other investments’
(c) Housing & infrastructure investments
Investee Company limits:
There are 2 limits for calculation of exposure norms to an Investee company:
(a) Overall exposure limit of all the funds of the insurer in all types of Securities in a Single Company
(b) Security-wise exposure limit for each Investee company for each type of investment category
The lower of (a) or (b) above determines the exposure limit for an Investee Company
(a) Overall exposure limit:
The overall exposure limit is calculated as follows:
(i) Aggregate all types of investments, viz., equity, debt etc. in a Single investee company
(ii) Aggregate investment assets of the insurer (i.e. addition of unit reserves, pension and annuity including Group and Life insurance funds)
(iii) (i) divided by (ii) shall not exceed 10%
In the case of non-life insurers the limit is 10% of their total funds
(b) Exposure limit based on nature of security for each type of fund
(i) For investment in equity, preference shares and convertible debentures
The limit is calculated as 10% of the outstanding face value of equity shares of the Investee company or 10% of assets belonging to each investment category based on type of business (unit reserves, Pension and Annuity including Group and Life insurance business). For non-life, total investment assets (policyholders’ funds and shareholders’ funds) are considered. The lower of (a)(iii) and (b)(i) is the Investee company limit.
(ii) For investments in Debentures, loans and other permitted investments (other than mentioned in (i) above)
The limit is calculated as 10% of the Capital, Free reserves, Debentures and Bonds of the investee company or 10% of each investment category based on type of business, as mentioned in (i) above The lower of (a)(iii) and (b)(ii) is the Investee company limit.
Increase in the Limit of 10% Based on the Size of Investment Assets
If the size of investment assets for an insurer touches `50,000 Crores, the investee company limit (on outstanding face value of equity shares for equity and Paidup capital, free reserves, debentures and bonds for Debt, loans and other permitted investments) stands increased to 12% and if the amount touches `2,50,000 Crores, the limit stands further enhanced to 15%.
Therefore, even though as per one rule, a limit of 10% for equity shares and 10% for debentures for each investment asset category is allowed, the overall exposure limit under (a) above, would bring down the exposure to 10% of all the funds. On the other hand, eventhough an insurance company is within 10% on the overall exposure limit under (a) above, it still will have to be within the limit of 10% for equity shares and 10% for debentures separately for each investment asset category. Thus, the investee company limits aims to achieve two objectives:
(i) Limiting the investment in each type of security, viz., equity, debt in each investee company to 10% of each type of investment category, i.e. unit reserves, pension & annuity and life insurance business
(ii) Limiting the overall exposure (all investments put together) to one investee company to 10% of overall investment assets
The above 2 limits are subject to a further limit of 10% (of 12% or 15% in some cases as explained above) of outstanding face value of equity shares of the investee company (for equity investments) or Share capital, free reserves, bonds, debentures (for Debentures, loans and other permitted investments), as the case may be.
Special dispensation for Infrastructure Related Investments :
Exposure to a Public Limited Infrastructure investment company can be increased to 20% of the Equity capital at face value for equity investments and 20% of equity plus free reserve plus debentures and bonds in the case of debt. However, this is subject to the overall exposure (all investments put together) at 10% of overall investment assets.
A special dispensation has also been given to Public Sector Special Purpose Vehicle engaged in infrastructure sector by allowing an investment upto 20% of the project cost, which is categorised as Approved investments, subject to the limit of 10% of overall investment assets
Investment in Immovable Properties
The limit for investments in immovable property is 5% of the aggregate of life funds, pension and annuity funds and group funds in the case of life insurers and 5% of investment assets in the case of general insurer
Investments in Promoter Group Companies of Insurer
The overall limit for investments in all the Promoter Group companies of the insurer is set at 5% of the aggregate funds of the insurer. Investments in Private equities prohibited. However investments in subsidiary companies allowed in terms of the provisions of Section 27A or 27B of the Insurance Act, 1938
Investment in Securitised Assets, e.g. Asset Backed Securities
The limit is 10% of investment assets for Life insurers and 5% for Non-life insurers
Exposure to Financial and Insurance Activities
The exposure to these activities under the Industry exposure norms cannot exceed 25% of investment assets. However, this limit excludes Bank deposits in terms of Section 27A or 27B
Limits for Group to which Investee Company belongs to
The limit to a Group to which the Investee company belongs shall be the least of the following:
(a) 15% of each of the investment asset categories
(b) 15% of investment assets in all Companies belonging to the Group
Industry exposure limits
The limit to the industry to which the investee company belongs to shall be the least of the following:
(a) 15% of each of the investment asset categories
(b) 15% of investment assets