Indian insurers urge IRDAI to revamp bond valuation to boost debt market

Business Standard

04-07-2025

Insurance companies are seeking a shift to a method that values bonds individually, for example differentiating between debt issued by state-run firms and private companies
Bloomberg
By Bhaskar Dutta and Saikat Das
Indian insurers have asked their regulator to revamp bond valuation norms, according to people familiar with the matter, a move that could encourage greater participation in the corporate debt market.
Insurance companies are seeking a shift to a method that values bonds individually, for example differentiating between debt issued by state-run firms and private companies, the people said, asking not to be named as the talks are private. The current approach assigns similar valuations to bonds with the same rating, they added.
The push for a new methodology comes at a time when Indian insurers' assets are rising, driving increased investment in debt securities. Easing valuation rules could improve liquidity in India's relatively shallow corporate bond market, they said.
As India's economy expands, the nation's insurance market will be the fastest growing among the other G20 nations, global reinsurance company Swiss Re wrote earlier this year.
Insurance companies are making the request to shield their so-called unit-linked insurance plans, or ULIPs, from potential losses, the people said. These plans combine investment in financial markets with life insurance coverage.
Growing market
The discussions around the valuation models signal a growing market, although a potential shift calls for careful risk management on the part of insurers, said Anil Gupta, senior vice president at ICRA Ltd., an affiliate of Moody's Ratings, that provides valuations for fixed-income instruments.
The current method — — the so-called matrix valuation — prices illiquid bonds to comparable securities that are more regularly traded. As a result, many bonds in an insurer's portfolio end up being valued the same way, the people said. This can lead to losses when the bonds are sold in the market, especially as the method doesn't distinguish between securities issued by state-owned firms and private issuers, they added.
In contrast, the preferred security-level valuation method accounts for the unique characteristics of each instrument. This shift would better align valuations with actual market transactions and conditions, they added.
While the security-level method is more reflective of market conditions, there are potential risks involved depending on the kind of securities being considered, said Gupta. If bonds being chosen are illiquid, then the method runs the risk of overstating the value of a portfolio, he said.