Insurers gain tools to manage volatility and protect returns

The Insurance Regulatory and Development Authority of India's (Irdai's) decision to allow insurers to hedge risks through equity derivatives will help them manage market volatility and protect policyholder returns.

- AATHIRA VARIER & KHUSHBOO TIWARI

However, this move is unlikely to alter their investment strategies.

Under the current regulatory framework, 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 to buyers.

Looking at the increasing trend in investments in the equity market by insurers and owing to volatility in equity prices, Irdai felt the need to permit insurers to hedge through equity derivatives. Life insurers typically invest nearly 30-35 per cent of their portfolio in the equity market and the remaining in the fixed income segment.