Recently, national private pension funds have been allowed to invest up to 5% of their investable funds in AIFs.
Par nirjhar majumdar
The Indian Insurance Regulatory and Development Authority (Irdai) has authorized insurers to invest a portion of their investable funds in “funds of funds” (FoF). FoF is a mutual fund that invests in other funds falling under alternative investment funds (AIFs) in which insurers are already authorized to invest a specific part of their investable fund. By investing in FoF, insurers can diversify their investments as long as they are safe and profitable.
Investments made by life insurers and pension funds can help grow our real economy. Insurers are considered to be in a better position to invest in AIFs like FoFs. It is also beneficial for insurers and pension funds to achieve a desirable asset-liability balance by investing funds in areas that require long-term funding.
Investments in AIFs
Mature markets around the world have proven that long-term direct investments in AIFs have helped diversify risk and increase total returns. For this reason, life insurance products and long-term savings-oriented annuities are the most popular products in these countries. In Taiwan, the country with the highest insurance penetration, around 80% of insurance products sold are whole life insurance products, as people get good returns from these products. Everywhere, the focus shifts from reducing the risk of investments to re-risking it, as risk-free investments earn lower and lower returns as interest rates continue to fall.
Recently, national private pension funds have been allowed to invest up to 5% of their investable funds in AIFs. Recognized provident funds have also been allowed to invest in national venture capital, SME funds and infrastructure-focused AIFs. The annual premium income of pooled insurers exceeds the total capital available in the entire AIF area of the country. So even a small part of this fund can transform AIFs.
Portfolio construction
Life insurance policy claims can be estimated with a significant level of precision. This allows insurers to invest in less liquid assets (like FoF) with confidence, earning better returns and securing cash inflows that can match cash outflows quite well. This policy can immunize the value of an insurer against possible changes in interest rates. Around the world, insurers are making fundamental changes to their portfolio construction in order to achieve better risk-adjusted returns. Irdai’s recent policy may enable insurers to be more competitive in the financial market and to further contribute to continued economic growth.
Insurers and annuity fund managers should invest in areas less correlated to traditional approved investments. Since FoF invests money in a wide range of industries, they are likely to generate above average returns. Large insurance companies and pension funds can invest in FoF to boost the startup ecosystem. It won’t be a bad investment as startups had grown 12-15% per year, even through 2019. The Covid pandemic has dampened the minds of startups to some extent, but they can get back on their feet if long term finance support is available.
Insurers who invest in riskier instruments should follow sound underwriting principles to reduce overall risk. Insurer persistence needs to improve dramatically so that more money can stay invested in the longer term. Insurers must have a good knowledge of the projects in which their money is invested. They need high-quality data to ensure the long-term viability of these projects.
Product innovations may be needed to ensure that surrender of certain types of short or short term policies is not permitted or permitted with higher penalties. In addition, tax breaks may be granted to those who invest money in policies for the very long term (25 years and over). If such steps are taken, there is no reason why the latest government and Irdai initiatives to allow insurers and annuity fund managers to invest money in FoF cannot change. the deal for the industry.
The author is Deputy Secretary, Kolkata Audit Center, LIC of India. Opinions expressed are personal
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