The Hindu Business Line : Non-life insurers active in bulk deposit, CBLO markets

Attractive options
During the last few months, they have switched to Treasury bills in view of attractive yields and high liquidity.
Most non-life insurers are active in the CBLO market since they are not allowed to operate in call money market.
Bulk deposits is win-win for both banks and insurers, as they get rolled over for up to a year.

Bangalore , May 3

Faced with large premium accretions, non-life insurers have become active in the bulk deposits and the collateralised borrowing and lending obligations (CBLO) markets.

Banking sources said substantial volume of the deposit growth was contributed through insurers. Non-life insurers have had large premium accretions in view of the annual policy renewals. These include both corporate as well as some of the retail insurance covers.

Switch to T-bills

Non-life insurers prefer highly liquid instruments with high yields for making investments. With liquidity in the markets tightening, long-term government securities have become less attractive. Consequently, during the last few months they have switched to Treasury bills in view of the attractive yields and high liquidity. Yields on the 91-day T-bill have come close to about 7 per cent last month when liquidity had tightened and 364-day yields have also overshot this level.

During this period, the sources said, non-life insurers in public and private sectors were also active in the CBLO markets. They used the CBLO route since they are not allowed to operate in the call money market.

One of the major conditions was that the returns would have to be in excess of their costs of premium acquisitions. Through the CBLO route, almost all the public and private non-life insurers have provided liquidity support to the banking sector and in the process earned large profits.

But with call rates down to five per cent, the CBLO markets have also cooled down. Besides, since the beginning of this fiscal year, yields on T-bills have dropped by at least 75 basis points. This hasresulted in bringing down the yields below the costs of premium acquisition.

Bulk deposits, CDs

Besides, bankers have been chasing bulk depositors offering high interest to fund credit growth. This has prompted the insurers to move over to bulk deposits.

Bankers said that for bulk deposits they were offering rates in excess of 8 per cent for maturities between 90 and 180 days. Besides, some of the private sector banks have also floated certificates of deposits (CDs) for raising funds offering slightly higher yields. Substantial volumes of the CDs were picked up by the insurers as part of their investments portfolios, the sources said.

Bankers said the preference for bulk deposits and short-term CDs were also driven by liquidity demand. Non-life insurers have greater preference for liquidity unlike life insurers who prefer to hold securities till maturity. The liquidity preference by non-life insurers is to meet their fund requirements in the event of the claims being invoked.

The sources said the CDs or bulk deposits were parked for a maximum of three months. But bankers said these were essentially long-term, since the deposits are rolled for up to a year. This made it a win-win situation for both banks and insurers.