IRDA may allow insurers to deal with equity derivatives

The Insur­ance Reg­u­la­to­ry and Devel­op­ment Author­i­ty (Irda) is look­ing to allow insur­ance com­pa­nies to deal with equi­ty deriv­a­tives. Irda has already allowed insur­ers to deal in rupee inter­est rate deriv­a­tives, includ­ing For­ward Rate Agree­ments (FRAs), Inter­est Rate Swaps (IRS) and Exchange Trad­ed Inter­est Rate Futures. The reg­u­la­tor had ear­li­er said par­tic­i­pants could under­take dif­fer­ent types of plain vanil­la FRAs or IRS. IRS hav­ing explicit/implicit option fea­tures are prohibited.

The reg­u­la­tor will also look at Real Estate Invest­ment Trusts (REITs) and if it is viable, they might dis­cuss with mar­kets reg­u­la­tor Secu­ri­ty and Exchanges Board of India to see if this could be used as an invest­ment oppor­tu­ni­ty by insur­ers. REITs are expect­ed enable eas­i­er access to funds for cash-strapped real estate players.

On the risk man­age­ment and mit­i­ga­tion front the reg­u­la­tor was study­ing the cat­a­stro­phe or cat bond mar­ket to see if such an instru­ment would have investor appetite in India. Cat bonds are used to fund claims after a cat­a­stroph­ic inci­dent. These bonds help re-insur­ers trans­fer the finan­cial risk of a cat­a­stro­phe in a year to investors.

Indi­a’s sole re-insur­er Gen­er­al Insur­ance Cor­po­ra­tion of India is also active­ly look­ing at cat bonds and their via­bil­i­ty. Indus­try play­ers say a com­bi­na­tion of Indi­an rupee and US dol­lar denom­i­na­tion would be the best-suit­ed model.