The Hindu Business Line : Derivatives hedging: IRDA working on guidelines

Hyderabad, Feb. 10 The Insurance Regulatory and Development Authority (IRDA) is working on guidelines to allow insurance companies to hedge their portfolios with derivatives. “Currently there is a ban on insurance companies to hedge their portfolios with derivatives. But we are working on this aspect,” Mr J. Hari Narayan, Chairman, IRDA, told Business Line.

At present, the insurance companies offering guaranteed products hedge their portfolios with simple derivatives such as Government bonds which offer very low interest rates (generally 4.5 per cent).

“However, guaranteed products which offer higher returns need complex derivatives,” Mr Narayan said.

Citing the Deepak Parekh committee’s report on infrastructure submitted to the Government in 2007, the IRDA Chief said it recommended that simple derivatives should be allowed. “We are actually working further on these recommendations.”

As the present global experience in this regard has been adverse, the authority prefers to tread cautiously on the issue. “We are examining the matter seriously though not in any rush,” he said.

Echoing similar views, Dr R. Kannan, Member (Actuary), IRDA, said the insurance regulator was not against derivatives but wants to be cautious on the matter given the recent global phenomena.

“If we look at the international market, the use of derivatives has helped insurance products and also the cost of capital has come down because of the use of derivatives,” he said.

When contacted insurance companies – though welcomed the move – said it was too early to comment on what sort of recommendations were expected from the regulator.

“If indeed the IRDA comes up with such guidelines then we will be able to offer more products which would assure higher returns,” they said.

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