NEW INVESTMENT RULES: Life insurers’ deposits with NBFI curtailed

The Insurance Development and Regulatory Authority (IDRA) has recently come up with a set of new investment rules for life insurance companies in a bid to minimise risks and ensure safety of policyholders’ money. 

The prime one is a reduction in the amount of asset a life insurance provider can keep in a non-bank financial institution (NBFI). It has been limited to 10 percent, which might deepen the ongoing liquidity crisis of the lenders.

As per previous rules framed in 1958, the insurers were permitted to keep 50 percent of their assets in the form of fixed deposits in banks or the NBFIs. There was no specific mention.

Insurance companies usually opted for the NBFIs as they offered higher returns than banks. As had been before, life insurance companies must invest at least 30 percent of their funds on government securities.

Of the remaining 70 percent, 10 percent will be allowed to be kept with the NBFIs as fixed deposits.

The IDRA brought such visibility in its recently published Insurance Regulations 2019. 

“Our capacity to keep fixed deposits in NBFIs will shrink,” said a senior official of a leading life insurance company.

Even, some of the life insurers now have to withdraw funds from the NBFIs to comply with the regulations, he added.

A number of insurers welcomed the changes, saying it would strengthen risk management of the insurance companies.

Gokul Chand Das, member of the IDRA, said life insurers have to comply with the decision but they would be given time.

“We will give them time to adjust their funds because we know it is not possible to rearrange some of their money overnight,” he said.

However, he cautioned that companies must comply with the regulations for the sake of both themselves and their policyholders.

“The new regulations will give them a clear guideline and it will ensure safety of their assets.”

According to the new regulations, life insurers will be allowed to keep their fixed deposits solely in those NBFIs which have at least an “A” rating or a similar grade. 

Moreover, a maximum 2 percent of assets can be kept with a single NBFI.

A maximum of 60 percent of assets can be invested as fixed deposits with scheduled banks.

The banks should be at least “A” rated and the amount with a single bank can be a maximum 10 percent.

According to the new regulation, life insurers will be able to invest 15 percent of assets in bonds issued for development of physical infrastructure and other bonds with rating of “AA” or above.

Around 10 percent of assets can be invested in debentures of companies or securities issued by city corporations. 

A company will also be able to invest 25 percent of its assets in ordinary shares or preferential shares of companies but not junk stocks. The amount of investment in mutual funds and unit funds will have to be within 20 percent of the assets.

A life insurer will be able to invest 20 percent of its assets in undisputed immovable assets located within city corporations and municipalities.

The companies will have to submit statements informing of the assets within 30 days of completion of audits on investment. They will have to file investment returns three times every year within 21 days from the last day of March, June and September.

According to the IDRA, currently there are 32 life insurance companies in the country and their assets totalled Tk 38,710 crore in 2018.