New Delhi, Feb 28 – In a significant move aimed at reducing market volatility risks for insurers, the Insurance Regulatory and Development Authority of India (Irdai) has permitted them to use equity derivatives for hedging their portfolios. The decision, outlined in the newly issued ‘Guidelines on Hedging through Equity Derivatives,’ follows repeated representations from insurers seeking risk mitigation measures.
Irdai stated that this initiative is designed to help insurers safeguard their equity investments from market fluctuations, ensuring stability and reducing risks in their portfolios. "This move aims to facilitate insurers in hedging their existing equity exposures against volatility in the equity market and ensure the preservation of market value of equity investments," the regulator noted.
Expanding Risk Management Tools for Insurers
Until now, insurers were allowed to engage in Rupee Interest Rate Derivatives, including Forward Rate Agreements (FRAs), Interest Rate Swaps, and Exchange-Traded Interest Rate Futures (IRFs). Additionally, they could deal in Credit Default Swaps (CDS) as protection buyers.However, with increasing investment by insurers in the equity market and the associated price fluctuations, Irdai recognized the need to expand risk management options. "These guidelines aim to provide insurers with enhanced opportunities for risk management and portfolio diversification," the regulator stated.
Key Provisions of the Guidelines
Under the new framework, insurers can hedge their equity holdings using stock and index futures and options, subject to defined exposure and position limits. However, Irdai has strictly mandated that equity derivatives be used solely for hedging purposes. Any exposure to Over-The-Counter (OTC) equity derivatives remains strictly prohibited.Before engaging in equity derivatives, insurers are required to implement:
- A Board-approved hedging policy
- Internal risk management processes
- Robust IT infrastructure
- Regular and periodic audits
By allowing equity derivatives for hedging, Irdai aims to enhance insurers' financial resilience, particularly amid unpredictable market conditions. This regulatory shift is expected to strengthen risk management capabilities while ensuring the security of policyholder investments.