Insurers set to take a big mark-to-market knock

IRDA Queers The Pitch

Mayur Shetty MUMBAI

THE life insurance industry stands to lose several hundred crores this year on account of the rise in interest rates. A recent directive from the insurance regulator, IRDA, requires companies to mark-to-market all investments made from their technical reserves in government securities.
    Besides the policyholders' funds that they invest, insurance companies invest in government securities the money they bring in to meet minimum net worth requirements. Until last year, these securities were valued at their acquisition price and insurers were required to mark-to-market only securities purchased from policyholders' funds. Since most of the policyholders' funds come from sales of unit-linked policies, the loss in the value of securities bought from policyholders' funds is reflected in the lower net asset value of the schemes and does not affect the company's own profits.
    But with the new guidelines, the balance sheets of life insurance companies are set to take a hit as well. Life insurance companies have brought in several thousand crores to meet the solvency margin requirements. These solvency margins prescribe the minimum net worth that a company is required to maintain in relation to its overall business and is somewhat similar to the capital adequacy ratio for banks.
    A portion of this net-owned funds is invested in government securities, which have fallen sharply in value because of the rise in interest rates. Insurers seek MTM norms similar to banks'
    "EVENa start-up company, which has a paid up capital of Rs 100 crore would have Rs 60-70 crore invested in government securities. The value of these securities would have fallen by Rs 6-10 crore in the last quarter and would have to be booked as provisions for depreciation and would add to the losses," said an industry official. He added that losses would be much higher in the range of Rs 20-80 crore for larger players.
    The insurance companies are likely to make a representation to IRDA that the valuation guidelines be brought in line with the valuation guidelines issued by the Reserve Bank of India. The banking regulator allows banks to classify their investment in government securities in three categories — 'held-to-maturity', 'available for trading' and 'available for sale'. Banks have taken advantage of this dispensation and classified most of their government securities holdings in the held-to-maturity (HTM) category. Once securities are transferred into the HTM category, no further provisions for depreciation are required. But they can only transfer the securities into the HTM category at market value, ie after booking a loss. Anticipating sharply lower profits because of this provision, banking stocks have been hammered in the capital markets.
    mayur.shetty@timesgroup.com