Why does IRDAI follow the RBI and SEBI's rules for investment management supervision?

 

 

While monitoring investments is crucial, it is important to note that insurance companies engage in other vital activities as well, such as underwriting, claims management, risk assessment, and customer service, but regulator not giving the same importance to investment.

Even though the IRDAI guideline implements the Risk Management System and Process under the INVESTMENTS - MASTER CIRCULAR IRDAI (INVESTMENT) REGULATIONS, 2016, which need to be audited by a System Auditor with previous experience and exposure in investment management underlying all types of investments referring to RBI guideline, restricting this roll to Statutory, Internal, and Concurrent as per the IRDAI (Investment) Regulation 2016, and it insists that all of these middle and back-office activities be overseen by the Chief Financial Officer of the insurance company as a reasonableness requirement.

Monitoring investments is a critical activity for insurance companies due to the following reasons:

 Asset-liability matching: Insurance companies operate under the premise of ensuring that their assets (investments) are adequately matched with their liabilities (policyholder obligations), the way how banks’ assets (investments) are adequately matched with their liabilities (Depositor obligations). They must maintain sufficient funds to cover policy claims and other obligations. Monitoring investments is crucial to ensure that the company's asset portfolio is aligned with its long-term liabilities, taking into account factors such as the duration, cash flow patterns, and risk profile of the liabilities. By closely monitoring investments, insurance companies can maintain the necessary liquidity and solvency to meet their obligations.

 Investment income: Investments generate a significant portion of an insurance company's income. Insurers typically invest in policyholder premiums and reserves to generate returns that contribute to their profitability and ability to fulfil obligations. Monitoring investments enables insurers to optimize the performance of their investment portfolio, seeking appropriate risk-adjusted returns. By closely tracking investment performance, insurers can identify opportunities to enhance investment income, manage risks, avoid investment erosion and make informed investment decisions.

 Risk management: Investments involve inherent risks, including market volatility, credit risk, liquidity risk, and interest rate risk. Insurance companies must actively, like banks and Mutual Funds monitor and manage these risks to safeguard the value of their investment portfolio. Regular monitoring allows insurers to assess the performance of different asset classes, diversify investments, evaluate credit quality, and ensure compliance with regulatory requirements. By actively managing investment risks, insurers can minimize potential losses, maintain stability, and protect the interests of policyholders.

 Regulatory compliance: Insurance companies are subject to regulatory oversight, and regulators often impose specific investment requirements to safeguard policyholder interests and maintain financial stability. But regulators insurer regulators are not as robust as other regulators – RBI and SEBI. Strict and timely monitoring of investments helps insurance companies ensure compliance with these regulations. It enables them to track and report on their investment activities, maintain appropriate asset allocations, meet solvency and liquidity requirements, and demonstrate their adherence to regulatory standards.

Reputation and stakeholder confidence: The investment performance of insurance companies can significantly impact their reputation and stakeholder confidence. Policyholders, shareholders, and other stakeholders closely scrutinize the investment strategies and results of insurers. By diligently monitoring investments, insurance companies can demonstrate transparency, accountability, and sound investment practices. This helps to build trust among stakeholders and reinforces the company's ability to fulfil its commitments.

 All these activities collectively contribute to the overall success and sustainability of an insurance company.

 

Logu Dhamdoaran

CEO. upDebts.com

Author's personal view