Key Points
- IRDAI permits insurers to use stock and index futures for hedging
Insurance companies can manage market volatility risks
Board-approved hedging policy mandatory for derivative trading
The move aims to help insurance companies protect their investments from market volatility while ensuring the preservation of their portfolio value.
Currently, insurers are allowed to trade in rupee interest rate derivatives such as forward rate agreements, interest rate swaps, and exchange-traded interest rate futures.
They are also permitted to deal in credit default swaps as protection buyers.
However, with insurance companies increasingly investing in the stock market, the regulator felt the need to allow hedging through equity derivatives to manage risks arising from fluctuating stock prices.
Under the new rules, insurers can use stock 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) trading in equity derivatives is strictly prohibited.
Before engaging in equity derivatives, insurance companies must establish a board-approved hedging policy.
They are also required to implement internal risk management systems, upgrade their IT infrastructure, and conduct regular audits.
Additionally, IRDAI has emphasised the need for a strong corporate governance framework to ensure that all derivative contracts undertaken serve the best interests of policyholders.
These guidelines are expected to provide insurers with better risk management tools and more opportunities for portfolio diversification.
Meanwhile, on February 17, the government asked private insurance companies to increase the free look period for policyholders from one month to one year.
M. Nagaraju, Secretary of the Department of Financial Services (DFS), announced this update at a post-Budget press conference in Mumbai.
The free look period is the time given to policyholders to cancel their insurance policy without any surrender charges.
Last year, the insurance regulatory body increased this period from 15 days to 30 days.
