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IRDAI may Prohibit Insurance Firms from Parking Funds in Promoter Banks Fixed Deposits

Insurance Regulatory & Development Authority of India (IRDAI) intends to prohibit insurance firms from parking funds in promoter banks’ fixed deposits (FDs) and certificate of deposits (CDs). Further, the regulator plans to put a limit on fixed income investments in other banks. For life insurance firms, the limit will be decreased to 3% and 10% for general insurers.

This new proposal, if approved, will spell trouble for insurance companies because their investments in bank deposits will drastically reduce from the current 15%-20% slab.

Owing to the proposal, SBI Life Insurance Company will be prohibited from investing in State Bank of India FDs, while Universal Sompo General Insurance Company will fail to park funds in its three promoter banks — Karnataka Bank, Indian Overseas Bank, and Allahabad Bank.  

IRDAI had previously attempted to apply such stringent rules but swerved upon being confronted by lobbying from the insurance sector. Currently, the limit of investment is capped at 5% for the life insurance companies. The reasons for re-introducing this proposal remain unanswered. Industry experts believe that this proposal will only increase the operational and fund management costs for the insurers, leading to higher premiums.    

In the investment regulations draft, IRDAI said, “Insurance companies cannot make any investments in FDs and CDs of their promoter group. Moreover, investments must not exceed 3% mark, regardless of fund size related to life insurance, unit-linked funds, pension, and annuity fund. In case of general and health insurance, the investments cannot exceed 10%.”

The draft was circulated on Monday, and IRDAI has asked for suggestions from stakeholders by 10 July, 2015.

The proposal may prove troublesome for the insurance companies, but IRDAI has offered relaxation in terms of immovable property. The regulator will evaluate the premises of conducting business as an investment asset instead of fixed. Under this clause, the investment assets monetize on the realty valuation, which would enhance the investment valuation.

Henceforth, Chief Risk Officer (CRO) will gain prominence; with IRDAI emphasizing they should be included as permanent members in the investment committee to improve industry compliance.  

Anup Rau, CEO, Reliance Life Insurance, said, “Since we are transacting public money, we must have a different view on our investments. Chief Investment Officer, plays a vital role, on one hand they make a sincere effort to improve ROI, on the other their investment decisions must be compliant to the industry standards. Therefore, a CRO offers a holistic view on compliance and investments.”

Source: This news was published on July 02, 2015 in economictimes.indiatimes.com under the title: “IRDAI might bar insurance firms from investing any funds in fixed deposits of promoter banks”