IRDAI Opens a New Investment Door: Insurers Can Now Buy AT1 Bonds and Tier 2 Capital of RBI-Regulated AIFIs
IRDAI's 19 December 2025 circular lets insurers invest in AT1 bonds and Tier 2 capital of RBI-regulated AIFIs. What it means for your policy's solvency, yields and the fine-print carve-outs.
On 19 December 2025, the Insurance Regulatory and Development Authority of India (IRDAI) issued circular Ref IRDAI/F&I/CIR/INV/142/12/2025, addressed to all insurers and reinsurers, permitting them to invest in Additional Tier 1 (AT1) bonds and Tier 2 capital instruments issued by RBI-regulated All India Financial Institutions (AIFIs). The move widens the universe of eligible debt for an industry that, as per IRDAI's Annual Report 2023-24, managed total investments of roughly Rs 61 lakh crore across life and general insurers. This deep dive explains what the circular actually says, why it matters for the solvency and yields of the policies you already hold, and the specific clauses buried in the fine print.
The Rule / Product
The circular IRDAI/F&I/CIR/INV/142/12/2025 of 19 December 2025 does one narrow thing: it extends an investment permission insurers already enjoyed for banks to a new category of issuer. Under the existing framework, IRDAI already allowed insurers to invest in AT1 bonds and in the debt and preference-capital instruments forming the Tier 2 capital of banks. The December 2025 circular now permits the same two instrument classes - (i) AT1 bonds and (ii) Tier 2 capital debt instruments and preference share capital instruments - when they are issued by AIFIs regulated by the Reserve Bank of India.
The trigger for the change sits on the RBI side of the fence. With effect from 1 April 2024, the RBI permitted AIFIs to issue Additional Tier 1 bonds and Tier 2 capital instruments under its Basel III Capital Framework prudential regulations (see rbi.org.in). Once AIFIs could legally raise regulatory capital through these instruments, a natural buyer base had to be cleared to hold them - and long-duration insurance money is among the most logical holders of perpetual and long-tenor paper. IRDAI's December 2025 circular closes that loop roughly 20 months after the RBI opened it.
There is one explicit carve-out in the permission. Insurers may buy Tier 2 debt instruments and preference share capital instruments of AIFIs, but perpetual cumulative preference shares are specifically excluded from the eligible list. That single exclusion, written into the operative paragraph of the 19 December 2025 circular, is the regulator's way of keeping the riskiest slice of hybrid capital off insurers' books even while opening the broader door.
The AIFIs in question are a small, defined club. As documented on the RBI's website, the Reserve Bank currently regulates five All India Financial Institutions: NABARD, SIDBI, EXIM Bank, the National Housing Bank (NHB) and the National Bank for Financing Infrastructure and Development (NaBFID), the last of which was established under the NaBFID Act, 2021. These are policy-mandated development lenders, which is precisely why letting Rs 61-lakh-crore of insurance capital fund their Basel III buffers is a considered - not casual - decision by IRDAI in its 19 December 2025 circular.
Critically, the circular does not create a free-for-all. It states that such investments must follow the existing provisions applicable to insurer investments in banks, set out in Chapter 3, para 1.6(b) and (d) of the Master Circular on Actuarial, Finance and Investment Functions of Insurers dated 17 May 2024. That master circular was itself issued under Schedule III, clause 12(6) of the IRDAI (Actuarial, Finance and Investment Functions of Insurers) Regulations, 2024 (available at irdai.gov.in). In plain terms: AIFI hybrid capital now sits inside the same prudential cage that already governs bank AT1 and Tier 2 exposures.
Why It Matters
For policyholders, the connection to this circular is indirect but real, and it runs through two numbers you rarely see: your insurer's investment yield and its solvency ratio. Every rupee of premium an insurer collects is invested, and under IRDAI's framework the minimum solvency ratio an insurer must maintain is 150%, a figure set out in the IRDAI (Actuarial, Finance and Investment Functions of Insurers) Regulations, 2024. Higher-yielding eligible assets can support stronger bonuses on participating policies and healthier capital buffers - but only if the added risk is contained.
AT1 and Tier 2 instruments typically price at a premium to plain government bonds precisely because they carry more risk. The bond yield on an AIFI AT1 bond can sit materially above the yield on a comparable-tenor government security, and that spread is the whole commercial point of the 19 December 2025 permission. An insurer that can now buy an AIFI AT1 bond yielding, say, 8.5% instead of a 7% sovereign bond picks up 150 basis points of extra income on that allocation - income that ultimately flows back into the pool that pays your sum assured and policy bonuses.
The flip side matters just as much. AT1 bonds are the instruments that can be written down to zero before an issuer formally fails, a feature baked into the RBI's Basel III Capital Framework from 1 April 2024. When an insurer holds more of this paper, the quality of its own capital becomes more sensitive to the health of the AIFIs it funds. That is why IRDAI kept the new permission inside the existing bank-investment guardrails of its 17 May 2024 master circular rather than writing looser rules for AIFIs.
For the ordinary buyer comparing a term insurance premium or a health insurance premium, none of this changes the price you pay in FY 2025-26. What it can change, over a multi-year horizon, is the financial strength behind the promise - and, for participating and ULIP policies, the investment returns credited to your fund. The circular of 19 December 2025 is a portfolio-diversification tool, and diversification is the single most reliable way an insurer manages the risk standing behind millions of policies.
Worked Numbers
Because IRDAI's 19 December 2025 circular does not publish instrument-level return figures, the arithmetic below uses clearly illustrative inputs to show how the economics work; it is not a forecast and no specific AIFI bond is implied. Treat every rupee figure here as a teaching example built on assumed rates.
Suppose a life insurer allocates Rs 100 crore to an AIFI AT1 bond carrying a coupon rate of 8.75% paid annually. The annual coupon income is simply Rs 100 crore x 8.75% = Rs 8.75 crore. Had the same Rs 100 crore gone into a sovereign bond at 7.10%, the income would be Rs 7.10 crore. The incremental income from the AT1 allocation is Rs 8.75 crore minus Rs 7.10 crore = Rs 1.65 crore per year, which is the 165-basis-point pick-up expressed in rupees.
The yield to maturity also shifts if the bond is bought at a discount. If that same 8.75% coupon bond with a face value of Rs 100 is purchased at Rs 97, the current yield rises to 8.75 / 97 = 9.02%, before accounting for the pull-to-par gain over the instrument's life. The table below lays out the comparison on a Rs 100 crore allocation.
| Instrument | Assumed coupon | Annual income on Rs 100 cr | Spread vs sovereign |
|---|---|---|---|
| Government security (7-yr) | 7.10% | Rs 7.10 cr | - |
| AIFI Tier 2 bond | 8.20% | Rs 8.20 cr | +110 bps |
| AIFI AT1 bond | 8.75% | Rs 8.75 cr | +165 bps |
Now consider the solvency dimension. IRDAI's required minimum solvency ratio is 150%. Suppose an insurer holds admissible assets of Rs 15,000 crore against a required solvency margin of Rs 9,000 crore, giving a solvency ratio of 15,000 / 9,000 = 166.7%. Reallocating Rs 100 crore from a sovereign bond to an AIFI AT1 bond does not, by itself, change the solvency ratio on day one - but if that AT1 bond is later written down to zero, the Rs 100 crore of admissible assets disappears, cutting the numerator to Rs 14,900 crore and the ratio to 14,900 / 9,000 = 165.6%. The point of the worked example is that the upside is a steady 165 bps of extra coupon, while the tail risk is a sudden, total loss of principal on the affected line.
| Scenario | Admissible assets | Required margin | Solvency ratio |
|---|---|---|---|
| Base case | Rs 15,000 cr | Rs 9,000 cr | 166.7% |
| After full AT1 write-down | Rs 14,900 cr | Rs 9,000 cr | 165.6% |
This is why the 19 December 2025 circular leans on diversification language rather than yield-chasing language: a single AT1 line should never be large enough to threaten the 150% floor, and the bank-investment limits imported from the 17 May 2024 master circular are the mechanism that enforces that discipline.
Pitfalls
The first trap is treating AT1 bonds as "safe because a government institution issued them". The RBI's Basel III Capital Framework, effective for AIFIs from 1 April 2024, allows AT1 instruments to be written down or to skip coupons at the issuer's or regulator's discretion. Indian investors have seen this play out: in March 2020, YES Bank's AT1 bonds were fully written down as part of its RBI-led reconstruction, a loss later litigated through the courts (case records are searchable on indiankanoon.org). An AIFI label does not remove the write-down feature embedded in the instrument class.
The second trap is coupon discretion. AT1 coupons are not a contractual certainty like a fixed deposit's interest; under the Basel III rules in force since 1 April 2024, they can be cancelled without triggering a default, and unpaid AT1 coupons are typically non-cumulative - meaning a skipped payment is gone for good, not deferred. This is a different risk profile from a plain debenture, and it is exactly why IRDAI's 19 December 2025 circular keeps these exposures inside tight bank-style limits.
The third trap is the preference-share carve-out, which is easy to misread. The circular of 19 December 2025 permits Tier 2 preference share capital instruments but specifically excludes perpetual cumulative preference shares. An insurer - or an analyst reading an insurer's disclosures - who assumes all AIFI preference capital is now eligible would be wrong: the perpetual cumulative variety remains off-limits under the operative paragraph of the circular.
The fourth trap is liquidity and tenor. AT1 bonds are perpetual, with no fixed maturity date, and their market liquidity can evaporate in stress, as the broader AT1 market demonstrated through 2020-21. For a policyholder, this matters because an insurer that over-concentrates in illiquid perpetual paper could face valuation swings; IRDAI's 150% solvency floor and the Chapter 3 limits of the 17 May 2024 master circular are the backstops, but no backstop makes perpetual paper behave like a 5-year bond.
The fifth trap is assuming the circular changes your policy's guarantees. It does not. Your guaranteed maturity benefit and sum assured are contractual obligations of the insurer regardless of how its investment book performs; the 19 December 2025 circular affects the asset side of the insurer's balance sheet, not the liability it owes you. The connection is to long-run financial strength and, for par and ULIP policies, to returns - never to the guaranteed figures printed in your contract.
FAQ
What exactly did IRDAI permit on 19 December 2025?
Circular IRDAI/F&I/CIR/INV/142/12/2025, dated 19 December 2025, permits all insurers and reinsurers to invest in AT1 bonds and in Tier 2 capital debt instruments and preference share capital instruments (excluding perpetual cumulative preference shares) issued by RBI-regulated All India Financial Institutions. It extends to AIFIs a permission that already existed for banks.
Which institutions count as AIFIs here?
As documented on rbi.org.in, the RBI currently regulates five All India Financial Institutions - NABARD, SIDBI, EXIM Bank, NHB and NaBFID (established under the NaBFID Act, 2021). The RBI permitted these AIFIs to issue AT1 and Tier 2 instruments from 1 April 2024 under the Basel III Capital Framework.
Does this circular make my policy riskier?
Not directly. Your guaranteed benefits remain contractual obligations, and IRDAI's minimum solvency ratio of 150% still applies. The circular of 19 December 2025 affects how insurers diversify their investment book; the new exposures sit inside the same bank-investment limits of the 17 May 2024 master circular.
Why did IRDAI exclude perpetual cumulative preference shares?
The 19 December 2025 circular permits Tier 2 preference share capital but carves out perpetual cumulative preference shares, which combine perpetual tenor with cumulative dividend rights and sit at the riskier end of hybrid capital. Excluding them keeps the most loss-absorbing, least predictable instruments off insurers' admissible-asset books.
How is an AT1 bond different from a fixed deposit?
An AT1 bond, under the RBI's Basel III rules effective for AIFIs since 1 April 2024, can have its coupon cancelled (usually on a non-cumulative basis) and its principal written down to zero before the issuer formally fails - as YES Bank's AT1 holders experienced in March 2020. A fixed deposit carries no such write-down feature and is separately covered up to Rs 5 lakh under DICGC deposit insurance.
Where can I read the primary sources?
The circular and the Master Circular on Actuarial, Finance and Investment Functions of Insurers dated 17 May 2024 are published at irdai.gov.in. The Basel III Capital Framework for AIFIs, effective 1 April 2024, is at rbi.org.in, and the YES Bank AT1 litigation can be traced on indiankanoon.org.
Should I change my insurance decisions because of this?
No. This is a back-office prudential change effective from 19 December 2025, not a product change, and it offers no basis to alter your cover. Decisions on how much protection to buy should be driven by your own needs - tools such as the term insurance premium and health insurance premium calculators remain the right starting point.