Investment Regulations for Life Insurers
Policyholders' money comes with rules on where it may go. Here are the ones IC-26 tests.
A life insurer invests money it will owe policyholders years later, so IRDAI decides what it may buy, how much of each, and how it must value what it holds. IC-26 tests three layers: the categories (Approved Investments and Other Investments), the exposure limits on particular instruments, and the accounting rules for valuing investments and loans.
An Approved Investment meets IRDAI's conditions on type, listing and rating. When an instrument stops meeting them, for example after a rating downgrade, it is automatically reclassified as an Other Investment. That reclassification rule appears again and again below, and it is a favourite question.
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Key Limits From IRDAI's Master Circular
Limits for life insurers unless stated. Figures are from the investment section of IRDAI's master circular on actuarial, finance and investment functions.
| Instrument | Rule |
|---|---|
| Reverse repo in corporate debt | Up to 10% of all funds taken together, and 10% of each segregated fund (SFIN). Life insurers cannot do repo, only reverse repo |
| Reverse repo in Government Securities | Treated at par with TREPS; the 10% limits do not apply |
| Repo terms | Tenor up to six months; prior Investment Committee approval; corporate debt underlying must be listed and rated at least AA; no deals with promoter group entities |
| Equity ETFs | Passive, SEBI-registered, tracking a public index; expense ratio up to 0.50%; domestic equities only (section 27E) |
| Mutual funds (Gilt, G-Sec, Liquid, Debt, Income together) | 10% of Investment Assets below ₹50,000 crore; 7% from ₹50,000 crore to ₹2,50,000 crore; 5% above. For life insurers, 15% at SFIN level |
| Any single mutual fund | Up to 20% of total mutual fund investments (ETFs included); a passive breach must be corrected within 30 days |
| Mutual fund run by the insurer's promoter group | 3% of Life Fund, Pension, Annuity and Group Funds; 5% of Unit Linked Fund |
| Housing or infrastructure ABS, PTC, SR | Rated at least AAA to be Approved; up to 10% of the respective fund for life insurers (5% of Investment Assets for general insurers) |
| REIT and InvIT units | Listed only; up to 3% of total fund size; up to 5% of the units of a single trust; no trust whose sponsor is in the promoter group |
| REIT and InvIT debt | Listed trust, rated AAA at investment, public holding at least 30%; up to 20% of a single trust's outstanding debt |
| Infrastructure investments | Approved if rated at least A with Expected Loss rating EL1 (category code IELB); below that, Other Investments (IOEL) |
When an Investment Drops to Other Investments
| Instrument | Trigger for automatic reclassification |
|---|---|
| Equity ETF | Fewer than 85% of the basket's securities meet the dividend distribution norms |
| Debt ETF (including CPSE Debt ETF) | Any underlying security is downgraded below AA |
| ABS, PTC, SR | Downgraded below AAA, or cash flows not received on the due date (reported in Form 3A Part A / Form 3B) |
| REIT or InvIT units | Rated below AA |
| REIT or InvIT debt | Downgraded below AA |
| Infrastructure investment | Downgraded below A or EL1 |
Other Instruments in the Circular
- check_circleGilt, G-Sec and Liquid mutual funds are Approved Investments. Debt and Income mutual funds are Other Investments.
- check_circleGILT-ETFs count within mutual fund exposure; they must hold only domestic Government Securities and have an expense ratio up to 0.50%, and the holding must not fall below the Creation Unit size.
- check_circleCategory I AIFs (Infrastructure, SME, Venture Capital and Social Venture funds) and Category II AIFs that invest at least 51% in those areas are allowed as Other Investments. AIF schemes with a priority distribution model, where losses could exceed the pro-rata share, are not allowed.
- check_circleCredit default swaps: buying protection shifts exposure from the reference entity to the protection seller (counted in the BFSI sector). No CDS on a promoter-group reference asset, between promoter-group entities, or on ABS/MBS, convertible bonds, bonds with call or put options, CLOs or CDOs.
- check_circleInvIT units and debt count as infrastructure investments. REIT units count as investment property; REIT debt counts under Real Estate Activities.
- check_circleREIT and InvIT units are valued at market price no older than 30 days, failing which at the trust's latest NAV no older than 6 months.
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How Investments Are Valued
From regulations 7 and 8 of IRDAI's financial statements regulations.
Debt securities, including government securities and redeemable preference shares
Valuation basis
Held to maturity: historical cost, subject to amortisation
Where gains and losses go
Premium amortised or discount accreted over the holding
Listed equity and derivatives in active markets
Valuation basis
Fair value: the lowest of the last quoted closing prices on the exchanges where listed
Where gains and losses go
Unrealised gains and losses to the Fair Value Change Account; recycled to profit or loss on sale
Unlisted equity, and listed shares not actively traded
Valuation basis
Historical cost, with a provision for diminution in value
Where gains and losses go
Reversal of the provision cannot lift the value above cost
Investment property
Valuation basis
Historical cost, revalued at least once every three years; tested for impairment at each balance sheet date
Where gains and losses go
Changes to Revaluation Reserve; recycled to profit or loss on sale
Loans
Valuation basis
Historical cost, subject to impairment provisions
Where gains and losses go
Provision at least for loans with interest or instalments unpaid for over six months
| Asset | Valuation basis | Where gains and losses go |
|---|---|---|
| Debt securities, including government securities and redeemable preference shares | Held to maturity: historical cost, subject to amortisation | Premium amortised or discount accreted over the holding |
| Listed equity and derivatives in active markets | Fair value: the lowest of the last quoted closing prices on the exchanges where listed | Unrealised gains and losses to the Fair Value Change Account; recycled to profit or loss on sale |
| Unlisted equity, and listed shares not actively traded | Historical cost, with a provision for diminution in value | Reversal of the provision cannot lift the value above cost |
| Investment property | Historical cost, revalued at least once every three years; tested for impairment at each balance sheet date | Changes to Revaluation Reserve; recycled to profit or loss on sale |
| Loans | Historical cost, subject to impairment provisions | Provision at least for loans with interest or instalments unpaid for over six months |
Key Terms
- Active market
- A market with homogenous securities, normal availability of willing buyers and sellers, and publicly available prices.
- Not actively traded
- A security whose trading volume did not exceed ten thousand units in any trading session in the last twelve months.
- Fair Value Change Account
- The equity account holding unrealised gains and losses on listed equity and derivatives. A debit balance is deducted from profit or free reserves before dividends, and nothing in it goes to shareholders beyond what IRDAI allows to be released to policyholders.
- Revaluation Reserve
- The equity account for changes in the carrying amount of investment property. An impairment beyond the reserve is expensed in the Revenue or Profit and Loss Account.
- Exposure on a reverse repo
- Taken on the counterparty, not on the securities held as collateral.
How HDFC Life and SBI Life Apply It
Single-company practice, useful for seeing the rules in action.
- check_circleHDFC Life accrues interest on investments, amortises premium or discount on debt straight-line, books listed dividends on the ex-dividend date and unlisted dividends when the right to receive is established.
- check_circleHDFC Life treats assets with interest or principal overdue for more than 90 days as NPAs. This is its own policy; the regulation's loan test is six months.
- check_circleHDFC Life moves investments from shareholders' to policyholders' funds at the lower of cost or market price (debt: lower of net amortised cost or market value), and makes no transfers between non-linked policyholders' funds.
- check_circleSBI Life values linked debt with over one year left at CRISIL prices, and under one year on yield to maturity. It values listed equity at the NSE closing price (BSE if not available), unlisted equity at historical cost, and mutual funds at the previous day's NAV.
Exam Traps
Life insurers may do reverse repo but not repo. Reverse repo in Government Securities is outside the 10% cap. Listed equity uses the lowest closing price, not the highest or the average. Unrealised equity gains go to the Fair Value Change Account, not to profit. Watch rating floors: AAA for securitised assets and REIT/InvIT debt at purchase, AA for repo underlyings and to stay Approved, A plus EL1 for infrastructure.
FAQs
What is the difference between Approved Investments and Other Investments?expand_more
Approved Investments meet IRDAI's conditions on type, listing and rating. An instrument that fails them, for example through a downgrade or a missed cash flow, is automatically reclassified as an Other Investment.
How much can a life insurer invest in REITs and InvITs?expand_more
Units are capped at 3% of total fund size, and no more than 5% of the units of a single trust. Only listed trusts qualify, and not those whose sponsor is in the insurer's promoter group.
How is listed equity valued in an insurer's balance sheet?expand_more
At fair value, taken as the lowest of the last quoted closing prices on the exchanges where it is listed. Unrealised gains and losses go to the Fair Value Change Account.
Can a life insurer enter a repo transaction?expand_more
No. Life insurers can do reverse repo in corporate debt up to 10% of all funds, but cannot participate in repo.
When must an insurer provide for a bad loan?expand_more
The regulations require a provision at least for loans where interest is unpaid for over six months or instalments are unpaid in the last six months.
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