Unit-linked insurance plans (ULIPs) - which are similar to mutual funds in design - will soon get prudential guidelines that are in line with those applied to mutual funds. The Insurance Regulatory & Development Authority (IRDA) is set to unveil exposure limits that will place caps on how much of ULIP funds insurers can invest in a single company.
The IRDA is vetting a proposal to make prudential or exposure norms mandatory for ULIPs to mitigate possible risks arising from investments in a few companies. "Although the investment risk in ULIPs is generally borne by the policyholder, minimizing the contagion risk is a regulatory concern," a senior official said. The policyholder makes gains or losses on the investment, depending on the performance of the fund. Most insurers offer a wide range of funds to suit the policyholder's investment objective, risk profile and time horizon. Different funds have different risk profiles. The potential for returns also varies from fund to fund.
When the IRDA first unveiled its investment guidelines, ULIPs were non-existent and most investments by insurance companies were in government securities. However, the introduction and sudden popularity of ULIPs has changed the scenario. In recent years, most of new money coming into insurance goes into ULIPs with many policyholders choosing the equity option. ULIPs are similar in design to mutual funds and have an added insurance cover for which the premium is paid through cancellation of units.
Mutual fund schemes are subject to exposure limits by the Securities & Exchanges Board of India (SEBI). In terms of the guidelines, a mutual fund cannot invest more than 10% of its capital in a single company. Also, a mutual fund cannot hold more than 10% of the shares of a company. Such measures are aimed at ensuring that unit holders are protected if an invested company goes bust.
Sources say that similar exposure limits are likely to be introduced for insurance companies too. Even today, insurance companies have to provide their internal investment guidelines when they launch a new scheme. It is only after the regulator is satisfied that all risk management measures are in place to protect the investors that the product is cleared. He added that the new guidelines are likely to put in place exposure limits in a structured way.
For investing in very large companies, the exposure limits are not a problem. The limits are a constraint when it comes to investing in small companies where even a tiny investment could be more than 10% of the company's equity capital. Already, ULIP funds of insurance companies figure among the top investors in some listed companies. If IRDA puts in place an exposure limit based on the investee company's paid-up capital, insurers may be forced to avoid small companies.
The IRDA is vetting a proposal to make prudential or exposure norms mandatory for ULIPs to mitigate possible risks arising from investments in a few companies. "Although the investment risk in ULIPs is generally borne by the policyholder, minimizing the contagion risk is a regulatory concern," a senior official said. The policyholder makes gains or losses on the investment, depending on the performance of the fund. Most insurers offer a wide range of funds to suit the policyholder's investment objective, risk profile and time horizon. Different funds have different risk profiles. The potential for returns also varies from fund to fund.
When the IRDA first unveiled its investment guidelines, ULIPs were non-existent and most investments by insurance companies were in government securities. However, the introduction and sudden popularity of ULIPs has changed the scenario. In recent years, most of new money coming into insurance goes into ULIPs with many policyholders choosing the equity option. ULIPs are similar in design to mutual funds and have an added insurance cover for which the premium is paid through cancellation of units.
Mutual fund schemes are subject to exposure limits by the Securities & Exchanges Board of India (SEBI). In terms of the guidelines, a mutual fund cannot invest more than 10% of its capital in a single company. Also, a mutual fund cannot hold more than 10% of the shares of a company. Such measures are aimed at ensuring that unit holders are protected if an invested company goes bust.
Sources say that similar exposure limits are likely to be introduced for insurance companies too. Even today, insurance companies have to provide their internal investment guidelines when they launch a new scheme. It is only after the regulator is satisfied that all risk management measures are in place to protect the investors that the product is cleared. He added that the new guidelines are likely to put in place exposure limits in a structured way.
For investing in very large companies, the exposure limits are not a problem. The limits are a constraint when it comes to investing in small companies where even a tiny investment could be more than 10% of the company's equity capital. Already, ULIP funds of insurance companies figure among the top investors in some listed companies. If IRDA puts in place an exposure limit based on the investee company's paid-up capital, insurers may be forced to avoid small companies.
