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Saturday, August 6, 2011

Safety first-how IRDA regulates investment management in insurance industry

Given the vast AUM of the insurance industry, investment management is a big business there. So the regulator(IRDA) has guidelines for that, which Chartered Accountants are asked to certify the company's compliance in that regard. Some of these guidelines are;-
  1. Seperate front office from middle office/back office. Former reports to CIO and latter report to CFO, so CIO cannot hide trade data
  2. Automatic data transmission from Front Office to Middle Office w/o scope to manually edit. Back office cannot rectify wrong data but only reject it
  3. For AUM>500Cr, fund manager cannot be the trader
  4. Outsourcing ban with limited exceptions-that too to be paid for by shareholders fund not by policy holders. At first blush, it seems unfriendly(why insist on expense in house handling) but then one should remember that outsourcing core competency(investment management IS one for this industry) is frowned upon by regulators, and by others.
  5. For security not traded within past 30days, book value used. Much stricter than SEBI which allows DCF valuation with appropriate liquidity discount. 
  6. Mandates extensive use of automation, especially for cash management and generation of routine/exception reports. Also, investment limits(sector/caps/liquidity/mix) are preset in the system, to ensure alerts before the trade happens. IRDA mandates this.
To their credit, the sector has never had a publicly reported major scam. So IRDA does seem to be on a right track in this regard.

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