Friday, July 4, 2014

IRDA Allows Insurance Firms To Hedge Interest Rate Risk

Insurance watchdog, the Insurance Regulatory and Development Authority (IRDA) in its guidelines issued recently, has allowed insurance companies to hedge their interest risks by participating in interest rate derivatives of a longer tenure.

As per current norms, insurance firms are allowed to enter Forward Rate Agreements (FRAs), Interest Rate Swaps (IRS) and Exchange Traded Interest Rate Futures (IRF) with a maximum tenure of one year.

The fresh guidelines allows insurance firms to participate in interest rate derivatives over one year. However, there is no upper limit for maturities of such instruments. This move of the regulator would help insurers protecting their return due to fluctuation in the interest rates and protect financial health.

However, a participating insurer's dealings in interest rate derivatives would not exceed an outstanding notional principal amount equivalent to 100 % of the book value of the fixed income investments of the insurer under the policyholders' fund, the guidelines said.

This would exclude ULIP funds in case of life insurers and the shareholders funds taken together, it added.

Similarly, the mark-to market gain or loss arising out of the effective hedge would be borne by the respective fund only. Exposure limits pertaining to single issuer, group and industry will be applicable for the exposure through FRA and IRS contracts, it said.

No contracts shall be entered with promoter group entities either directly or indirectly, it added.

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