Context:
In order to hedge against market volatility, the IRDAI has allowed insurers to use equity derivatives. The predominant aim of this is to hedge against the erosion of the market value of equity investments, as well as mitigating the portfolio risks primarily emerging from greater participation of insurers in equity markets.
Regulatory Guidelines and Conditions Prescribed
- Instruments allowed
- Regulatory stock and index futures and options on shares will be specifically for hedging any currently existing equity exposures.
- Prohibited
- All OTC (Over the Counter) exposures to equity derivatives are prohibited.
- Corporate Governance
- A Hedging Policy is thus mandated for approval by the Board. Risk Management Policy Framework, IT Infrastructure, and Conduct of Periodic Audits among the foremost. Contracts will protect the interest of policyholders.
- Reporting Requirements
- Details regarding any derivative contracts will have to be in the ULIP sales brochures. They are to submit quarterly reports regarding turnover, unwinding of contracts, or profit loss.
Impacts on the Insurers
- Increased advantage for life insurers because the larger exposure to equity markets (ULIPs primarily).
- A process to be put in place but which may take months due to the need for board approval and upgrading of internal systems.
- Already dealing with fixed income derivatives (FRAs, Interest Rate Swaps, Credit Default Swaps as Protection Buyers).
A Look at Strengthening Risk Management in Insurance Investments
- This step allows insurers to wield heavier instruments to modulate high volatility, hitherto increased holding stability in insurance investments with sanity on governance. This is a very big leap forward towards risk management for the Indian insurance business.
Source: BS
