India: Regulator allows insurers to hedge through equity derivatives
Source: Asia Insurance Review | Apr 2025
The IRDAI is allowing insurers to tap the derivatives market to hedge their equity investment exposure amid a rising trend of equities investments by insurers and volatility in the prices of equities.
To this end, the IRDAI has issued the “Guidelines on Hedging through Equity Derivatives” that lists the derivatives that insurers are allowed to use. These are stock futures, index futures, stock options and index options. The guidelines state that the use of these derivatives is subject to position limits. Over-the-counter exposure to equity derivatives is prohibited.
Funds of insurers permitted to use equity derivatives are unit linked funds; life funds; pension, annuity and group funds; and investment assets of general or health insurers. A robust corporate governance mechanism must be put in place for dealing in derivatives. Insurers have to formulate a board-approved hedging policy; set internal risk management policies and processes; install the appropriate information technology infrastructure; and carry out audits.
The new regulation is likely to help insurers that offer unit linked insurance plans (Ulips) whose funds are exposed to the equities market. The insurers will also share the details of the derivative contracts in the sales brochures of Ulips. A