New Delhi: The insurance regulator will set up a committee to draw up guidelines to classify the investment portfolios of insurance companies, a move that could require them to value their investments and make necessary provisions according to prevailing market conditions.
Life insurers are allowed to link policyholders’ funds to market prices, such as in the case of unit-linked policies (Ulips), but they can’t do so with the funds they are mandated by law to maintain to meet potential liabilities.
Currently, they invest such funds in debt securities and record the investment at book value, or the price at which they were bought. This method does not require the firms to provide for the loss if the value of investment falls, or makes a profit if the market prices rise.
The Insurance Regulatory and Development Authority, or Irda, plans to implement the norms in line with those for banks. The Reserve Bank of India, allows classification of investments in three categories—held to maturity (HTM), held for trading (HFT) and available for sale (AFS).
Under HTM, debt securities are held till maturity. These are recorded at the initial cost and are not affected by market movements. HFT securities are subjected to active trading for the purpose of profit taking, while AFS securities are not traded or held till maturity but are recorded at market value.
“The proposal for classifying investments of insurance companies into different components would help in developing well-understood guidelines of valuation and provisioning requirements for the investments made by the insurers,” said C.R. Muralidharan, the regulator’s member for finance.
Irda usually requires the government to effect changes in insurance laws through Parliament. In this case, Muralidharan said, the regulatory and operational issues involved would be examined shortly through Irda’s standing committee on accounting issues, which could meet sometime in early September. “Regulatory changes required would be examined only thereafter.”
Irda is yet to decide on the composition of the panel that would work on the guidelines.
Last week, in the absence of any classification guidelines, Irda deferred its decision that required all companies to value their debt securities, set aside for the purpose of computation of solvency margins, at the lower of the acquisition cost and the market value.
Currently, the entire investment portfolio of non-life companies is treated as HTM, said Sanjeev Chanana, director and general manager, Oriental Insurance Co. Ltd.
“The classification of investment portfolio into held to maturity, held for trading and available for sale categories will have far-reaching implications for the insurance companies,” he said. “If the classification comes into effect, in case of debt portfolio, there will be greater incentive to invest in tradeable securities. Thus the insurance companies will be able to earn a better yield from their debt portfolio — not only from interest income but also from sale of such securities,” he added.
“As far as the tax implication goes, in the first year when this classification comes into effect due to mark to market, we will need to pay about 35% tax at the current tax levels. Further we will be taxed for short-term capital gain.”
Mark to market is a term to account for investments based on prevailing market prices. Under this, companies will have to record a mark-to-market gain or loss depending on the changes in the market value of their investments.