Providing cover to insurers

Finance Minister P Chidambaram knows that efforts to shore up the capital of the insurance companies by raising the foreign investment cap beyond 26 per cent is difficult through this Parliament. He has decided to help from a different direction instead. Monday's relaxation of investment avenues for insurance companies mean they can get higher return on the business they generate ó their premium income.

Those had begun to fall off. Total premium collected by the country's 24 life insurers fell by 3 per cent to Rs 2,83,315 crore for 2011-12 compared to Rs 2,91,605 crore in 2010-11. More worryingly, new business premium fell by nearly 10 per cent to Rs 1,13,678 crore in 2011-12 as against a year ago which meant less people are buying life insurance.

Of this premium almost 75 per cent goes into government or government mandated papers, returns from which will be cumulatively less than what a comparable fixed deposit in a bank will earn.

The Monday package will thus make the insurance money happily sweat harder. That is a win-win situation for all ó the insurance sector, the economy and of course those who buy insurance policies. Easier investment rules that allow the companies to especially tap the infra sector SPVs is a major gain. Insurance companies still face restrictions in accessing debt securities through capital markets, so the relaxation now allowed mean they can bypass that restriction. As the minister pointed out, it carves out a 12.5 per cent window in their investment funds that will translate into better returns and cheer customers. That the minister has to call a separate meeting for non-life insurance companies shows the gridlock in which the sector had been kept by an overprotective regulator. It is interesting to note the Irda is an "invitee" to the next meeting, which should rightfully have been its own.

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