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Informist, Friday, Feb. 28, 2025

 

--IRDAI allows insurers to use equity derivatives to hedge equity portfolios 

--IRDAI issues norms allowing insurers to use equity derivatives for hedging 

 

MUMBAI – The Insurance Regulatory and Development Authority of India Friday allowed insurers to use equity derivatives for hedging their existing equity exposure, and issued guidelines for this. The regulator initiated this move considering the request of insurers for more hedging tools, increasing trends in equity market investments, and the associated volatility in the equity space. 

 

The insurance regulator has allowed unit-linked funds to invest in equity intruments, and life funds to use equity derivatives. Pension, annuity and group funds, and investments assets of general or health insurers have also been allowed to participate in equity derivatives, IRDAI said in a notification.

 

Insurers are allowed to hedge through exchange traded equity derivatives such as stock futures, index futures, stock options, and index options. The regulator barred insurers from having any over-the-counter exposure to equity derivatives.  

 

IRDAI had allowed insurers to participate in derivatives for the first time in 2004, through fixed income derivatives. This was extended to rupee interest rate derivatives in 2014, allowing hedging in the form of forward rate agreements, interest rate swaps, and exchange traded interest rate futures.

 

On exposure, the regulator said that the total derivative positions in a fund should not exceed the market value of the underlying equities held within the same fund. If there is any violatiion of this limit, insurers should rectify it within 15 days. IRDAI also capped the number of stock futures contracts and stock put options at the quantity of respective underlying investments. 

 

Further, it said that the notional value of hedging through index futures and index put options together should not be more than 20% of the market value of the unhedged portion of equity holding of the same fund. Insurers should follow the position limits prescribed by stock exchanges or the Securities and Exchange Board of India for trading members. 

 

The regulator requires a hedging policy approved by the board before insurers take exposure to equity derivatives. The policy has to include "hedge accounting framework and detailed methodology for determination of hedge effectiveness, indices to be used for hedging and rationale for selecting such indices". Besides, information technology policies, processes, and infrastructure should be put in place before entering equity derivative. 

 

Implementation of the policy on derivatives will be under the responsibility of the investment committee, under the oversight of the insurer's board, the regulator said.  End

 

Reported by Christina Titus 

Edited by Avishek Dutta

 

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