The Insurance Regulatory & Development Authority (Irda) has indicated that it would allow life insurers to hedge 5 to 10% of their exposure in equity portfolios through derivative instruments.
The 22 life insurers?which have emerged as the second largest set of investors after foreign institutional investors in the capital markets?have been pressuring the regulator for such hedging avenues for some time.
Speaking to FE, J Hari Narayan, chairman, Irda, said, ?We are still examining the issue, as we are yet to take a regulatory position on the issue. I agree that it may help life insurers to hedge their money to certain extent, but we don?t want that there should be any gambling with policyholders? money.?
The insurance industry has an equity portfolio of Rs 2.7 lakh crore. Between April and October this year, life insurers have invested Rs 28,000 crore in equities. In 2008-09, they had invested Rs 52,000 crore.
The global financial crisis last year had left the regulator nervous about insurers using derivatives; that?s why a decision has not been taken on the issue so far. However, Irda is understood to have reconsidered the matter and is poised to allow insurers to hedge up to 10% of their equity portfolio. Irda has already permitted the life insurers to buy interest rate futures to protect themselves from rupee volatility.
SB Mathur, general secretary, Life Insurance Council, the representative body of life insurers, said since the insurance market has matured, Irda can allow the use of derivatives now.
?I think, the time is ripe to allow them. However, I do agree that it should be allowed cautiously to avoid any speculative use of policyholders? money.?
Shashi Krishnan, chief investment officer, Bajaj Allianz Life Insurance, said, ?The derivative market has massive liquidity. The average daily turnover in the market is around Rs 83,000 crore (at NSE, as on December 23). This is far more than the liquidity available in the cash market (it was just over Rs 15,000 crore as on Wednesday). So, the options will lower the transaction cost and give us a risk-free arbitrage position in the market.??