Synopsis
The Insurance Regulatory and Development Authority of India (IRDAI) has introduced new guidelines enabling insurers to employ equity derivatives for hedging equity investments. This move aims to shield insurance companies from market volatility while safeguarding their portfolio value, allowing them to use stock and index futures and options for hedging.Key Takeaways
- New IRDAI guidelines allow equity derivatives for hedging.
- Insurers can use stock and index futures and options.
- OTC trading in equity derivatives is prohibited.
- Insurers must have a board-approved hedging policy.
- Free look period for policyholders extended to one year.
New Delhi, Feb 28 (NationPress) The Insurance Regulatory and Development Authority of India (IRDAI) has recently established new protocols that permit insurers to utilize equity derivatives for hedging their equity investments.
This initiative is designed to assist insurance firms in safeguarding their investments against market fluctuations, while also ensuring the protection of their portfolio value.
At present, insurers are authorized to engage in trading with rupee interest rate derivatives, including forward rate agreements, interest rate swaps, and exchange-traded interest rate futures.
They are also allowed to participate in credit default swaps as protection buyers.
However, due to the increasing investments of insurance companies in the stock market, the regulator recognized the necessity to permit hedging through equity derivatives to manage risks stemming from variable stock prices.
According to the newly established regulations, insurers are permitted to use stock and index futures as well as options to hedge their equity holdings.
It is important to note that these derivatives are strictly limited to hedging purposes, and over-the-counter (OTC) trading in equity derivatives is not allowed.
Before they can engage in equity derivatives, insurance companies must develop a board-approved hedging policy.
They are also mandated to put in place internal risk management systems, enhance their IT infrastructure, and perform regular audits.
Moreover, the IRDAI has stressed the importance of a robust corporate governance framework to guarantee that all derivative contracts undertaken are in the best interests of policyholders.
These new guidelines are anticipated to equip insurers with improved tools for risk management and greater opportunities for portfolio diversification.
Meanwhile, on February 17, the government instructed private insurance companies to extend the free look period for policyholders from one month to one year.
M. Nagaraju, the Secretary of the Department of Financial Services (DFS), revealed this update during a post-Budget press conference held in Mumbai.
The free look period allows policyholders the opportunity to cancel their insurance policy without facing any surrender charges.
Last year, the insurance regulatory authority extended this period from 15 days to 30 days.
