The Insurance Regulatory and Development Authority (IRDAI) on February 28, 2025, issued Guidelines on Hedging through Equity Derivatives under clause 13 of Schedule III of IRDAI (Actuarial, Finance and Investment Functions of Insurers) Regulations, 2024.
Considering the requests from the insurers, the increasing trend in investments in the equity market by insurers and owing to the associated volatility in the equity prices, a need was felt to permit hedging through Equity Derivatives as a countermeasure. Hence, the Guidelines on Hedging through Equity Derivatives are issued.
The following objectives are as stated:
The equity derivatives are permitted for insurers:
• To hedge against volatility in equity market.
• To ensure preservation of market value of equity investments.
• To reduce equity portfolio risk.
The key highlights are as stated:
Insurers are allowed to take short positions in Stock Futures and Index Futures to the extent of the existing holding of underlying equities1 in the respective funds.
The short futures position shall be taken within the same fund (segregated Linked fund or same fund/ sub-fund within the Life fund or Pension, Annuity and Group fund of the Life Insurers or investment assets of General or Health Insurers) where the underlying equities are held.
The total equity derivative positions in a fund (stock futures, stock options, index futures and index options, all put together) at notional value (arrived as per para no. 6) shall not exceed the market value of underlying equities held within the same fund (Segregated fund or same fund / sub-fund within the Life fund or Pension, Annuity and Group fund of the Life Insurers or investment assets of General or Health Insurers) on any day. However, passive breaches, if any, in the said limits are to be corrected within 15 days.
The equity derivatives shall be used only for hedging purpose, against long positions in equities held by the insurer at the time of taking derivative position.
Exposure to the derivative position taken for hedging purposes shall not exceed the quantity of underlying position against which hedging position has been taken.
Before taking exposure to equity derivative positions, the Board and the senior management of Insurer shall take note of the nature of the risks undertaken, complexities involved, stress levels etc. Insurers shall at least once in a quarter, report their equity derivative positions / transactions, exposure and position limits compliance to Risk Management Committee. At periodical intervals, the Board shall review the contracts undertaken and satisfy themselves that adequate risk measurement, management policy and procedures & controls for derivative contracts permitted in these guidelines, have been established and are functional and the positions taken on equity derivatives are not prejudicial to the interest of the policyholders.
[Notification No. IRDAI/F&I/GDL/INV/041/02/2025]
