Life Insurers Urge IRDAI to Address Gold Investment Opportunities
Multiple life insurance companies are seeking approval from the Insurance Regulatory and Development Authority of India (Irdai) to invest in gold exchange-traded funds (ETFs). This move comes in response to soaring gold prices and a growing demand for diversification in investment portfolios, especially as traditional avenues yield lower returns. Notably, gold ETFs have delivered impressive returns of over 30% in the past year, contrasting sharply with the modest gains from conventional investment options.
Investment Strategy Shift
The life insurance sector, which currently manages assets totaling ₹70 lakh crore, is exploring new investment strategies to enhance returns for policyholders. Companies are requesting permission to allocate 3-5% of their unit-linked insurance plans (ULIPs) assets to gold ETFs. This shift is driven by the stark difference in performance between gold ETFs and other investment vehicles, such as liquid debt funds and bank fixed deposits, which have only provided returns of 5-8%. An insurance executive highlighted that the significant disparity in returns is prompting the industry to consider gold ETFs as a viable option to improve portfolio performance and provide a hedge against market volatility.
The Irdai has advised these companies to submit their proposals through the Life Insurance Council, which represents the interests of life insurers. The regulatory body is looking for comprehensive proposals that outline potential risks and strategies for mitigating them. The final decision will be made after a thorough evaluation of the submissions from the sector.
Gold’s Rising Significance
Gold has increasingly become a vital reserve asset for many countries, particularly in the wake of economic disruptions caused by the Covid-19 pandemic and escalating geopolitical tensions. Central banks around the world have ramped up their gold purchases, with the Reserve Bank of India (RBI) acquiring 57.5 tonnes of gold during the 2024-25 fiscal year, marking the second-largest annual increase since 2017. The RBI’s gold reserves have surged by 35% over the past five years, reaching 880 tonnes by the end of FY25, up from 653 tonnes in FY20.
According to the World Gold Council, gold now constitutes approximately 12% of India’s total foreign exchange reserves, a significant increase from 6.86% in 2021. This growing recognition of gold as a secure investment during times of global instability is influencing the insurance sector’s push for expanded investment options.
Broader Investment Opportunities
In addition to gold ETFs, stakeholders in the insurance sector are advocating for a broader range of investment alternatives. They are requesting permission to invest in zero-coupon bonds and long-duration corporate debt, particularly from infrastructure companies. While insurers currently have the authority to invest in government securities, equities, and infrastructure, they face limitations in accessing long-term instruments that align with their extended liability periods.
Infrastructure companies typically issue five-year debt instruments, which many insurers find inadequate for their investment needs. As a result, the sector is urging the government to introduce 20- and 30-year sovereign zero-coupon bonds. The potential for gold investments is underscored by their historical performance, yielding twenty-fold returns over the past 25 years, further solidifying gold’s appeal as a strategic investment choice.
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