The insurance and regulatory authority of India is thinking to allow life insurance companies to invest in equity derivatives. Equity derivatives are a category of financial instruments. Their value is derived from partly from one or more underlying equity derivatives. Traders invest in equity derivatives to hedge their risk which they acquire due to exposure to the equity market. Options are the most common form of equity derivatives being traded in today’s market. The matter is under consideration and the guidelines for the matter have not been finalized yet. Currently insurance companies are allowed to invest 50 percent of their funds in government securities, 15 percent in infrastructure related projects, and the remaining 35 percent in non-approved instruments for traditional policies.
These non-approved instruments consist of equities, mutual funds and other money market instruments. Currently life insurance companies invest in these instruments so they do get exposure to risk posses by equity. Once they are allowed to invest in equity derivatives, they will be able to hedge their risk and protect returns of policyholder. It will also serve the option of one more option for their investment portfolio and insurance companies will love to expand their investment portfolio. Indian insurance companies are going through a very critical phase. Regulator has been proactive on various issues regarding policyholder and industry’s interest.
In the recent past, they have revived a lot of policies like restructuring charges structure in an insurance policy in the interest of policy holder. Though Indian insurance industry is in nascent stage and south Asian financial industry is mainly driven by banks. As these economies will grow, the importance of insurance sector is bound to grow. Indian saving rate is high so there is lot of space for growth of this sector. A unit link product offers insurance and returns both, so they have gained a lot of attraction among investors. This move of allowing insurance companies to invest in derivatives will increase their attractiveness and companies will be able to manage their risk in a better way.
Once the guidelines are out and insurance companies get final direction on the issue, the final picture will be clearer. Investors and companies, both would be in a better position to make their views, but it will definitely help both parties to safeguard their interests.
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