IRDAI, insurers likely in talks to relax investment rules amidst amendments to Insurance Act

For insurers that sell policies with guarantees or long-dated commitments, persistently low returns also compress margins and reduce flexibility in product design, industry executives said.

• IRDAI may let insurers increase exposure to corporate debt and alternative assets
• IRDAI can now adjust investment rules without needing parliament approval.
• Insurers may shift portfolios from government securities to higher-yield assets.

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The Insurance Regulatory and Development Authority of India (IRDAI) and insurers are in discussions to gradually permit higher exposure to select corporate debt, private companies and alternative investment instruments, as low returns from government-securities-heavy portfolios are weakening insurers’ investment performance.

The move is aimed at improving returns, broadening investment avenues, and strengthening insurance as an attractive long-term investment option for investors.

This potential development comes at a time when the Reserve Bank of India (RBI), too, recently flagged concentration risk in government securities. “The immediate trigger for the renewed focus on investment norms may have been the RBI's recent assessment that insurers remain excessively concentrated in sovereign debt,” a senior official at a life insurance company said.

While government securities offer stability and easy liquidity, the RBI has cautioned that an overly conservative investment mix makes it harder for insurers to meet policyholders’ return expectations in an environment of rising inflation, the official added.

In simple terms, low-yielding portfolios risk eroding the real value of long-term savings, weakening the appeal of insurance products compared with mutual funds, pension products and other market-linked instruments offering better risk-adjusted returns.

For insurers that sell policies with guarantees or long-dated commitments, persistently low returns also compress margins and reduce flexibility in product design, industry executives said.

At the heart of the discussion is a basic trade-off facing the insurance industry, which is safety versus returns. Indian insurers invest a large share of policyholders’ money in central and state government bonds. However, these instruments typically deliver lower returns, especially after adjusting for inflation.

However, after the recent amendments to the Insurance Act, sources told Moneycontrol that IRDAI is now better placed to respond to this challenge after recent amendments to the Insurance Act shifted most investment prescriptions out of the statute and into regulations. This change gives the regulator greater flexibility to fine-tune asset-allocation rules without requiring parliamentary approval each time adjustments are needed.

The timing matters.

Insurers today manage an asset base of Rs 74.4 lakh crore, making even small changes in investment limits financially and systemically significant.

Regulatory amendments give IRDAI greater room to manoeuvre

Against this backdrop, IRDAI is expected to use its expanded regulatory leeway to gradually broaden the universe of assets insurers are allowed to invest in.

Industry practitioners say this could include calibrated increases in exposure to high-quality corporate bonds, limited permission to invest in private companies, and clearer frameworks for participating in alternative investment vehicles such as infrastructure and private credit funds, which are all areas that typically offer higher yields than government bonds, but carry higher risk.

“Insurers are likely sitting on long-duration liabilities, but their portfolios are still overwhelmingly tilted towards government securities,” said a senior industry executive. “The regulatory changes may now give IRDAI the tools to rebalance this over time, without compromising on safety.”

Executives also said that any expansion in exposure would be phased and tightly monitored, with emphasis on credit quality, asset-liability matching and transparency.

Higher-rated corporate bonds and carefully structured alternative instruments are seen as the most likely starting points, according to sources, alongside stronger internal risk controls and board-level oversight.

Why Section 27 matters

The legal foundation for this shift lies in the consolidation of Sections 27A, 27B, 27C and 27D of the Insurance Act into a single Section 27.

Under the amended framework, investments in central and state government securities will continue to be governed directly by the Act, preserving statutory safeguards for the safest asset classes. All other investment rules, such as exposure limits, eligibility criteria and risk conditions, will now be specified through IRDAI regulations.

Earlier, many of these limits were hard-coded into law, leaving little scope for timely changes as markets evolved or new asset classes emerged. The new structure allows IRDAI to respond more quickly to shifts in interest rates, credit markets and long-term savings behaviour.

Liquidity flexibility adds another lever

Another enabling factor is the easing of restrictions on liquidity management.

The amended Act clarifies that the prohibition on creating encumbrances on assets backing policyholders' liabilities does not apply to repo, reverse repo and securities lending transactions.

This effectively allows insurers to use high-quality securities to raise short-term liquidity without breaching statutory safeguards, improving balance-sheet efficiency and reducing the need to hold excess cash or low-yield assets purely for liquidity purposes.

Regulators and industry participants emphasise, however, that any relaxation will be incremental.