IRDAI permits insurers to use stock and index derivatives for hedging equity exposure, benefiting life insurers managing long-term ULIP investments
Mumbai: The insurance regulator on Friday permitted insurers to use equity derivatives for hedging their existing equity exposures. This has been a long-pending demand from life insurance companies who have large equity exposures from their Unit Linked Insurance (Ulips) business and are required to remain invested in the stock market for long periods while also targeting to preserve the market value of their investments during volatile periods.
The new guidelines allow insurers to 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. The existing norms allowed insurers to deal in financial derivatives, rupee interest rate derivatives in the form of Forward Rate Agreements (FRAs), Interest Rate Swaps (IRS), Exchange Traded Interest Rate Futures (IRFs), and Credit Default Swaps.
“The relaxations are more helpful to life insurance companies as they have large Ulip funds and are required to remain invested in equities for long periods, thereby exposing them to the vagaries of the stock market. On the other hand, general insurance companies can always reduce their equity exposures if they are witnessing over-valuations in the market,” said Aneesh Srivastava, chief investment officer at Star Health Insurance.
Insurers are allowed to use the following exchange-traded equity derivatives to hedge their existing positions—stock futures and index futures, short positions in stock futures and index futures to the extent of the existing holding of underlying equities in the respective funds. Further, insurers are allowed to take the position of an Option Holder (buyer) and are allowed to buy only put options of stocks and indices against the existing underlying equity holding.
Before taking exposure to equity derivatives, insurers have to put in place a Board-approved Hedging Policy, said the IRDAI.
