IRDAI allows insurers to use equity derivatives for hedging market risks
The Insurance Regulatory and Development Authority of India (IRDAI) has introduced fresh guidelines permitting insurers to use equity derivatives to hedge their market investments. This strategic move aims to safeguard insurance companies from market volatility while ensuring portfolio stability.
New Delhi: The Insurance Regulatory and Development Authority of India (IRDAI) has introduced fresh guidelines permitting insurers to use equity derivatives to hedge their market investments. This strategic move aims to safeguard insurance companies from market volatility while ensuring portfolio stability.
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Current Investment Regulations for Insurers
Prior to this update, insurers were only allowed to trade in rupee interest rate derivatives, including:
- Forward rate agreements
- Interest rate swaps
- Exchange-traded interest rate futures
Additionally, they were permitted to use credit default swaps as protection buyers. However, given the growing investments of insurance companies in the stock market, IRDAI recognized the need for hedging through equity derivatives to mitigate risks associated with stock price fluctuations.
Key Highlights of the New Guidelines
Under the new IRDAI rules:
- Insurers can now use stock and index futures and options to hedge their equity holdings.
- The use of equity derivatives is strictly limited to hedging purposes.
- Over-the-counter (OTC) trading in equity derivatives is prohibited.
- Insurers must develop a board-approved hedging policy before engaging in equity derivatives.
Risk Management and Corporate Governance
To ensure responsible trading, insurance companies must:
- Implement robust internal risk management systems.
- Upgrade their IT infrastructure for effective risk monitoring.
- Conduct regular audits for compliance.
- Establish a strong corporate governance framework to protect policyholder interests.
These measures are designed to provide insurers with enhanced risk management tools while promoting portfolio diversification.
Government Push for Extended Free Look Period in Insurance Policies
In a related development, the government has urged private insurance companies to extend the free look period for policyholders from one month to one year.
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M. Nagaraju, Secretary of the Department of Financial Services (DFS), made this announcement at a post-Budget press conference in Mumbai on Febr
