IRDAI Approves Equity Derivatives for Insurers to Mitigate Market Volatility

The Insurance Regulatory and Development Authority of India (IRDAI) has recently introduced a new regulation allowing insurers to use equity derivatives for hedging purposes. This strategic move is expected to improve the insurers’ risk management, protect the market value of equity investments and diversify the portfolio more efficiently. 

The latest circular issued by the regulator notes the rising risk of equities and volatility that insurance firms are exposed to. “Taking into account the demands of insurers and the tendency towards equity investments, there was a need to allow hedging through equity derivatives as a counteraction,” IRDAI explained. Therefore, insurers can now employ stock and index futures and options to manage their existing equity risks in accordance with the set rules. 

Impact on Insurance Companies 

The new regulation is especially important for life insurers who are engaged in managing Unit Linked Insurance Plans (ULIPs) because these products have a high level of exposure to equities. The use of derivatives will help insurers manage their risks and maintain a stable return on investments while safeguarding the policyholders’ interests. 

This has been applauded by various stakeholders in the industry. Speaking to media, Aneesh Srivastava, Chief Investment Officer at Star Health Insurance said that the regulation will provide insurers with more freedom to manage their investment portfolio. “Derivatives as a hedging tool will be most useful to life insurers who deal with ULIP portfolios. Still, it may take a few months to implement it since it requires system preparedness, board approval, and process changes, he added. 

Regulatory Framework and Governance Requirements 

To avoid any loophole in the implementation of the regulation, IRDAI has put in place a detailed regulatory framework that regulates insurers’ operations in the derivatives market: 

  • Permitted Instruments – Insurers are allowed to engage in the use of equity derivatives for hedging only and are restricted from having OTC derivative exposure. 
  • Position Limits –Exposure and position limits must comply with regulatory requirements to prevent the excessive use of derivatives. 
  • Board-Approved Hedging Policy – Every insurer is required to have a hedging policy that has to be approved by the board of directors, and the hedging policy has to be supported by the internal risk management frameworks and periodic audits. 
  • IT and Operational Readiness – Companies must establish the appropriate IT systems to track and control the derivative positions. 
  • Derivative Contracts – The board and senior management have the responsibility of ensuring that derivative contracts are not prejudicial to policyholders. Also, the insurers are required to provide information on derivative transactions in the sales brochures of ULIPs to ensure that the customers are informed. 
  • Regulatory Reporting – Insurers are obliged to file reports for turnover, position closure and profit or loss from equity derivative contracts every quarter. 

Current Derivatives Framework for Insurers 

The IRDAI had permitted insurers to invest in Fixed Income Derivatives, like: 

  • Forward Rate Agreements (FRAs) 
  • Interest Rate Swaps (IRS) 
  • Exchange-Traded Interest Rate Futures (IRFs) 
  • Credit Default Swaps (CDS) from the Protection Buyers Perspective 

Equity derivatives have become another tool in the hands of insurers to manage their investment risks and thus enhancing their portfolio. 

Conclusion

Author Bio

Paybima Team

Paybima is an Indian insurance aggregator on a mission to make insurance simple for people. Paybima is the Digital arm of the already established and trusted Mahindra Insurance Brokers Ltd., a reputed name in the insurance broking industry with 17 years of experience. Paybima promises you the easy-to-access online platform to buy insurance policies, and also extend their unrelented assistance with all your policy related queries and services.

Choose from India’s top insurers

Latest Post

Global coverage in a health insurance policy ensures access to quality healthcare services across different countries. Whether you travel frequently or seek advanced medical treatments abroad, a global health insurance plan provides financial security and peace of mind.

 

See nowSee now

Surrendering a LIC policy is not recommended. However, sometimes policyholders want to surrender policy to invest in other products with greater returns. In this post, we are discussing the steps to follow to surrender LIC policies and how to calculate LIC surrender value. 


LIC or Life Insurance Corporation of India is considered one of the most reliable insurers in India with high repute. The company offers varied plans and products to secure the lives of individuals and their families. LIC plans are available for different tenure with varied coverage options to benefit the policyholders accordingly.

See nowSee now

The most important thing required for an insurance policy to continue is to pay the premium of the plan on time. When you buy a health or life insurance plan from LIC or Life Insurance Corporation of India, the smoothest way of paying the premium is through LIC Merchant. Let us take a look at the LIC merchant portal.

See nowSee now

It is a matter of fact that buying health insurance plans does make a person carefree about the financial burden laid out at the time of a health care need. But does that mean anything, and everything used for medical treatment will be covered under a health insurance policy? You need to think about it twice, as there are a bundle of non medical expenses in health insurance, which are not covered under any health insurance plan. The surprising thing is that a majority of policyholders are not aware of the non-medical expenses listlaid out by the IRDAI or Insurance Regulatory and Development Authority of India.

See nowSee now

If you are financially independent and want to plan your finances ahead, you must buy a Life Insurance Policy. It will give you coverage and in case of your death, the nominee will get the death benefit. Nevertheless, before you purchase an insurance policy, you must go through some insurance questions. Here are some of the life insurance FAQs.

See nowSee now