Mumbai: Insurance companies are treading cautiously in adopting new investment instruments, with equity derivatives yet to pick up even after six months of regulatory approval and bond forward rate agreement (FRA) transactions seeing few trades.
There have been some signature deals in bond forward rates, with more expected as trading shifts to the Clearing Corporation of India (CCIL), helping cut counterparty risk, industry insiders said.
However, equity derivatives, despite regulatory approval, have yet to see any activity.
In a recent meeting held with the Insurance Regulatory and Development Authority of India (Irdai), insurers said they are working on risk management frameworks and upgrading treasury IT systems before wading in.
Equity derivatives are most likely to be used by life insurance companies to hedge their equity exposure under products like unit-linked insurance products (Ulips). In FY23-24, life insurers had total Ulips funds of ₹7.60 lakh crore.
In February, Irdai allowed insurers to tap the derivatives market to hedge their equity investment exposure following representations by the insurance industry.
It had asked insurers that before taking exposure to equity derivative positions, their board and the senior management should take note of the nature of the risks undertaken, complexities involved, stress levels and, at least once in a quarter, report their equity derivative positions exposure and position limits compliance to risk management committee.
In the recent meeting, insurers told the regulator they will start with small exposures while boards put in place risk management frameworks and upgrade treasury IT systems to handle derivatives. Since equity derivatives are a risky area, their boards wanted proper systems in place before they start, insurers said.
As per the regulation, insurers are required to disclose in the sales brochure of Ulips the equity schemes involved, the intention to trade in equity derivative products, risks, and returns ensuing from the derivative contracts.
On bond FRAs-contracts that allow parties to lock yields of bonds before they are floated-industry officials said there have been a few deals. "The market itself is slightly dull," a senior insurance executive said. "These products are mainly used for hedging guaranteed non-par products, and demand for those is muted when interest rates are soft."
The discussions were on the recent investment proposal which includes allowing investments in gold ETFs and higher REIT and InVit limits.
The regulator pushed back against demands by a few insurers for larger gold allocations, insisting that insurers first demonstrate diversification benefits with existing limits.
There have been some signature deals in bond forward rates, with more expected as trading shifts to the Clearing Corporation of India (CCIL), helping cut counterparty risk, industry insiders said.
However, equity derivatives, despite regulatory approval, have yet to see any activity.
In a recent meeting held with the Insurance Regulatory and Development Authority of India (Irdai), insurers said they are working on risk management frameworks and upgrading treasury IT systems before wading in.
Equity derivatives are most likely to be used by life insurance companies to hedge their equity exposure under products like unit-linked insurance products (Ulips). In FY23-24, life insurers had total Ulips funds of ₹7.60 lakh crore.
In February, Irdai allowed insurers to tap the derivatives market to hedge their equity investment exposure following representations by the insurance industry.
It had asked insurers that before taking exposure to equity derivative positions, their board and the senior management should take note of the nature of the risks undertaken, complexities involved, stress levels and, at least once in a quarter, report their equity derivative positions exposure and position limits compliance to risk management committee.
In the recent meeting, insurers told the regulator they will start with small exposures while boards put in place risk management frameworks and upgrade treasury IT systems to handle derivatives. Since equity derivatives are a risky area, their boards wanted proper systems in place before they start, insurers said.
As per the regulation, insurers are required to disclose in the sales brochure of Ulips the equity schemes involved, the intention to trade in equity derivative products, risks, and returns ensuing from the derivative contracts.
On bond FRAs-contracts that allow parties to lock yields of bonds before they are floated-industry officials said there have been a few deals. "The market itself is slightly dull," a senior insurance executive said. "These products are mainly used for hedging guaranteed non-par products, and demand for those is muted when interest rates are soft."
The discussions were on the recent investment proposal which includes allowing investments in gold ETFs and higher REIT and InVit limits.
The regulator pushed back against demands by a few insurers for larger gold allocations, insisting that insurers first demonstrate diversification benefits with existing limits.
