New Delhi: The Indian Insurance Regulatory Authority (IRDAI) proposed new guidelines on Friday that allow insurers to hedge their equity investments using equity derivatives. The move is designed to help insurers protect their investments from market volatility while ensuring that their portfolio value is retained.
Currently, insurance companies are allowed to trade at interest rate derivatives of rupee, such as forward rate agreements, interest rate swaps and exchange rate futures. They are also allowed to trade as a credit default swap that protects buyers. However, as insurance companies increasingly invest in the stock market, regulators see the need to hedge through stock derivatives to manage risks arising from stock price fluctuations.
Under the new rules, insurance companies can use stocks and index futures and options to hedge their equity holdings. However, these derivatives can only be used for hedging purposes and over-the-counter (OTC) transactions in equity derivatives are strictly prohibited. Insurers must establish a board-approved hedging policy before engaging in equity derivatives.
They are also required to implement internal risk management systems, upgrade their IT infrastructure and conduct regular audits. Furthermore, IRDAI highlights the need for a strong corporate governance framework to ensure that all derived contracts are in the best interest of policyholders.
These guidelines are expected to provide insurance companies with better risk management tools and provide more opportunities for portfolio diversification. Meanwhile, on February 17, the government asked private insurers to increase the free appearance of policyholders from one month to one year.
The Secretary of the Department of Financial Services (DFS) M. Nagaraju announced the update at a budget press conference in Mumbai. The free browsing period is the time for policyholders to cancel their insurance policy without any surrender fees. Last year, insurance regulators increased the period from 15 days to 30 days.
