IRDAI authorises insurers to invest in Fund-of-Funds

Overview

IRDAI has permitted insurers to invest a portion of the investment in their “Fund of Funds” (FoF). FoF is a pooled fund that invests in other Alternative Investment Funds (alternative investment funds) into which some of its investment funds have already been approved by insurers. Insurers can diversify their investment to a secure and profitable degree by investing in FoF.

Life insurers and pension funds investments will contribute to the development of our real economy. Investment in AIFs such as FoFs is perceived to be safer for insurers. Insurers and pension funds also benefit from achieving attractive asset liability matching investment funds in areas that need long-term funding.

Investments in AIFs

Modern global markets have been shown to diversify risks and increase total returns through direct, long term investments into AIFs. For this reason the most favourite products in these countries are longer-term savings-oriented life insurance products and rents. Around 80 percent of the insurance products sold in the Taiwanese country with the highest insurance income are whole life products, so there are great returns on such products. Even because risk free investments generate lower and lower profits as the interest rate continues to collapse, the emphasis is moving from de-risky investments to re-risk.

Domestic private retirement funds have recently been permitted to invest up to 5% of their investment funds in AIFs. Investment in domestic venture capital, SME fund and AIFs with emphasis on infrastructure was also permitted with recognised provident funds. The insurers’ annual premium profits pooled together exceeds the overall resources available in the country’s AIF. Even a small part of this fund will therefore turn the AIFs.

Portfolio Construction

Claims under the plans for life insurance can be calculated with considerable precision. This allows insurers to invest comfortably in lower cash assets (such as FoF) and obtain higher income and cash inflows which can balance cash outflows very well. This strategy will immune the value of an insurer from possible increases in interest rates. In order to generate better risk-adjusted returns, insurers around the board make radical adjustments. The recent policy of Irdai will allow insurers to become better able to compete on the financial market and help further economic growth.

Investments must be made in areas less associated with conventional permitted investments for insurers and managers of annuity funds. Since FoF invests capital in a large range of sectors, it is likely to generate higher profits than average. In order to boost the start-up ecosystem, large insurance and pension funds will invest in FoF. It is not a bad investment, because start-ups grew by 12-15% every year up to 2019. The pandemic at Covid has to a certain degree reduced the spirit of startups but if long-term financial support is available they will again stand on foot.

In order to minimise overall risks, insurors investing in riskier instruments should comply with sound basic principles. Insurers’ persistence needs to be substantially improved to enable more capital to stay invested over time. Insurers should be fairly familiar with the programmes where their money is spent. To verify the long-term feasibility of these ventures, they need high quality data.

Product developments may be necessary to make those types of policies not permitted or permitted for heavy penalties to surrender in the short or near term. In addition, those who spend money in very long-term policies may be given tax reliefs (25 years and more). There are no reasons why the government and Irdai’s new steps to enable insurers and managers of annuity funds to invest money in FoF cannot be a game changer to industry if such measures are taken.