IRDAI to ask insurers to create debenture redemption reserve

The Insurance Regulatory and Development Authority of India (IRDAI) is likely to ask insurers to create a debenture redemption reserve (DRR). This was discussed at a recent meeting of the authority, and is being followed up.

The DRR provision was added to the Indian Companies Act, 1956, in the year 2000 and has also been included under Section 71 of the Companies Act, 2013.

Under this, an Indian company that issues debentures has to create a redemption pool to protect investors against the possibility of default by the company.

From its side, the insurance regulator had notified the IRDAI (Other Forms of Capital) Regulations, 2015. As per the regulations, funds raised through public/private placement are subjected to a “progressive hair cut” for the purpose of computation of available solvency margin subject to some specifications.

According to IRDAI data, nine general insurers have already raised funds through public/private placement.

No clarity

There has been no clarity for some insurers on whether they need to create DRR in line with the Companies Act.

While clarifying that the Act exempts banks and all-India financial institutions, including LIC, from creating DRR, the IRDAI said insurers should be advised to create a DRR.

However, it was indicated in the meeting that the DRR would only be a reserve, not a liability. Hence, it should not be considered a liability while computing the solvency margin.

The meeting had also decided to insert a provision in the IRDA (Protection of Policyholders’ Interests) Regulations on unit-linked insurance policies (ULIPs).

It is now mandatory for insurers to inform policyholders about the bonus accrued to their policies or the value of their ULIPs at least once a year through letter or email or any other electronic mode.

It has also been decided to defer implementation of the Indian Accounting Standards (Ind AS) in the insurance sector by two years, which means it will come into effect in FY21.