IRDA's new directive has left insurance companies worried. Here's why

Insurance companies, which investment significantly in India’s capital markets, have been asked by the regulator not to make deals with brokers for trading in government securities, according to a report in The Economic Times. 

This, the report says, has left insurance companies in a quandary. 

The move is significant as close to half the portfolio of insurers are held in sovereign papers and other state-backed securities. Of the 100-odd government bonds, about 5-6 are liquid papers.

What exactly has the regulator said?

ET said that according to a new directive by the Insurance Regulatory and Development Authority (IRDA) that has sent all insurers into a tizzy, buying and selling of sovereign securities can only happen on the anonymous trading screen.

IRDA has also laid down that while using intermediaries for trades in equities and corporate bonds, no broker should handle more than 5% of the total volume in secondary market transactions. The insurance regulator has inserted these conditions in the 'Master Circular on Investments' while reviewing the earlier set of directives which were issued in 2016.

IRDA, in the 'Master Directive' released on October 27, 2022, has categorically said that "all secondary market trading in government securities shall be placed via NDS-OM only." The Negotiated Dealing System - Order Matching (or, NDS-OM), operationalised by the Reserve Bank of India (RBI), is a faceless trading platform where orders are matched without revealing the identity of the buyer or the seller.

What do the insurers now want?

According to the report, the insurers now want the regulator to reconsider its decision.

What could be the other implications of the IRDA order?

The report says that the directive on spreading trades across a larger number of brokers could force companies to empanel less efficient brokers. The intention of the regulator may be to lower transaction cost and bring in greater transparency.

What does the Insurance Act says at present?

The Insurance Act, 1938 requires a life Insurer to invest its controlled funds as per Section 27A and a general insurer to invest its total assets as per Section 27B in 'approved investments'. The Act further requires a life insurer to hold not less than 50% and a general insurer to hold a minimum of 30% in approved securities, which includes investment in government of India securities.