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Insurance regulator IRDA is considering allowing life insurers to invest part of policy holders' money in equity derivatives, a move that would allow these firms to hedge the risks emanating from cash markets.
"We are considering to allow life insurers to invest their equity portfolio in futures and options. The matter is being examined," Insurance Regulatory and Development Authority Chairman J Harinarayan told PTI.
Equity derivative is a financial contract whose value is derived from the estimated future price of stocks or stock indices and is generally used as a hedge or insurance against the risks associated with the underlying instrument.
When asked what percentage of the equity portfolio would be invested in derivatives market, Harinarayan said, "We have not reached to any conclusion on it. We are just examining the matter and the guideline has not been issued."
Insurance companies will be able to hedge their equity exposure and protect returns of policyholders if these firms are allowed to invest in equity derivatives.
Life insurers, at present, are allowed to invest 50 per cent of their funds in government securities, 15 per cent in infrastructure-related projects, and the balance 35 per cent in other-than-approved instruments for traditional policies.
These other-than-approved instruments consists equities, mutual funds and other money market instruments.