Insurers are now in a hurry to rejig their portfolio towards highly rated debt instruments.
The liquidity crisis at non-banking financial companies (NBFCs), which has been brewing since June 2018, is now getting deeper now. Large institutional investors like insurance companies are facing pressures of investments getting downgraded.
While insurers are required to invest at least 95 percent of funds in above A+ rated instruments (for unit-linked plans it is AA+ and above), the recent downgrades of debt papers has tightened the noose around returns.
An Economic Times report said that a few insurers have sought regulatory forbearance on complying with investment norms.
This is after a few select instruments of Reliance Capital group companies were downgraded. If there is a breach in the 5 percent limit due to a downgrade, insurers are required to correct that within three days. However, insurers have expressed inability to correct it within such a short duration.
"We cannot write off all the exposure from our books. Provisions for doubtful instruments are already up 2X compared to last year and the bad news is not over," said the chief investment officer at a bank-promoted insurance firm.
The insurance regulator on the other hand wants companies to not just rely on credit ratings of their investments, but wants them to apply their own judgement.
Apart from Reliance Capital, other firms like DHFL and IL&FS had also faced liquidity crisis. In fact, it was IL&FS that triggered the debt crisis situation.
At the time of investment, IL&FS instruments were AAA rated. The infrastructure lender has been facing debt crisis since June 2018 after it defaulted on inter-corporate deposits and commercial papers (borrowings) worth Rs 450 crore. Over the next three months, rating agencies downgraded the company's long term ratings.
Post that, several group entities were downgraded and missed a series of debt payments. IL&FS has a cumulative debt of Rs 91,000 crore.
IRDAI Chairman Subhash Khuntia had said in March 2019 that considering policyholders' interest, insurers have been asked to not pull out of investments once there is a ratings change.
The regulator has also asked insurers to bring out a risk registry. Each insurer will list out the type of risks that they face and the possible solutions for those risks. Khuntia added that this is like a guidance being given to them.
