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IRDAI issues norms allowing insurers to use derivatives for hedging their equity portfolios

by AIP Online Bureau | Feb 28, 2025 | Eco/Invest/Demography, Indian News, Life, Non-Life, Regulation, Risk Management | 0 comments

In line with these guidelines, insurers will be able to buy hedges in stock & index futures and options against their holding in equities subject to the exposure and position limits. The equity derivatives shall be used only for hedging purpose. Any Over
The Counter (OTC) exposure to equity derivatives is prohibited

Hyderabad: The Insurance Regulatory and Development Authority of India (IRDAI) has issued comprehensive guidelines permitting insurers to utilise equity derivatives to hedge their equity portfolios.

It will facilitate insurers to hedge their existing equity exposures against volatility in equity market and ensure preservation of market value of equity investments and thereby reducing risks in equity portfolio.

These guidelines aim to provide insurers with enhanced opportunities for risk management and portfolio diversification.

In line with these guidelines, insurers will be able to buy hedges in stock & index
futures and options against their holding in equities subject to the exposure and
position limits. The equity derivatives shall be used only for hedging purpose. Any Over
The Counter (OTC) exposure to equity derivatives is prohibited.

As there is an increasing trend in investments in equity market by insurers and owing
to associated volatility in the equity prices, a need is felt to permit hedging through
Equity Derivatives.

Before taking exposure to equity derivatives, insurers are advised to put in place Board
approved Hedging Policy; Internal Risk Management Policies and Processes;
Information Technology Infrastructure; and Regular and Periodic Audits.

A robust corporate governance mechanism shall be in place wherein the board and senior management reviews the contracts undertaken are not prejudicial to the interest of the policyholders.

Insurers are required to furnish prescribed reports to the Authority on quarterly basis.

Under the current regulatory framework, IRDAI allows insurers to deal in Rupee
Interest Rate Derivatives in the form of Forward Rate Agreements (FRAs), Interest
Rate Swaps and Exchange Traded Interest Rate Futures (IRFs). Besides Fixed
Income Derivatives, insurers are also permitted to deal in Credit Default Swaps (CDS)
as Protection Buyers.

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