IRDAI allows insurers to deal in Rupee Interest Rate Derivatives in the form of Forward Rate Agreements (FRAs), Interest Rate Swaps and Exchange Traded Interest Rate Futures (IRFs). Besides Fixed Income Derivatives, insurers are also permitted to deal in Credit Default Swaps (CDS) as Protection Buyers.
As there is an increasing trend in investments in equity market by insurers and owing to associated volatility in the equity prices, a need is felt to permit Hedging through Equity Derivatives. These guidelines aim to provide insurers with enhanced opportunities for risk management and portfolio diversification.
In line with these guidelines, insurers will be able to buy hedges in stock & index futures and options against their holding in equities subject to the exposure and position limits. The equity derivatives shall be used only for hedging purpose. Any Over The Counter (OTC) exposure to equity derivatives is prohibited.
Before taking exposure to equity derivatives, insurers are advised to put in place Board approved Hedging Policy; Internal Risk Management Policies and Processes; Information Technology Infrastructure; and Regular and Periodic Audits. A robust corporate governance mechanism shall be in place wherein the Board and Senior management reviews the contracts undertaken are not prejudicial to the interest of the policyholders.
