In a bid to give more options in long-term investments and to hedge interest rate risks for life insurance companies, the Insurance Regulatory and Development Authority (Irda) may allow investments in equity derivatives and credit default swaps (CDS).
In addition, the insurance regulator is also set to allow insurance companies to hedge interest rate risk via interest rate futures (IRFs) for tenures of more than one year. The move is aimed at enabling hedging long-term risks associated with guaranteed returns on unit-linked pension products.
Currently, insurance companies are allowed to participate in interest-rate futures with a one-year tenure only. Irda is likely to come out with some guidelines on this by the end of this fiscal.
"We are thinking along these three lines so that long-term risks could be hedged in a proper manner. We will be coming out with guidelines on these soon," said J Hari Narayan, chairman, Irda, while addressing the media on the sidelines of 14th Global Conference of Actuaries in Mumbai on Monday. The chairman added this would help revive the unit-linked pension market.
Equity derivative is an instrument where value is derived from the estimated future price of stocks or stock indices and is generally used as a hedge against associated risks.
Industry experts believe these steps are urgently required to revive the unit-linked business in the life insurance industry.
The sales of Ulips and pension plans have been northbound since September 2010, when the regulator reduced the commission charges in Ulips and mandated a guarantee on pension plans.
With choppy equity market and overall slowdown in the economy adding to the woes, the performance of the life insurance industry has been dismal in the current financial year, with the first-year premium collection down 17 per cent during the April-December period.
The insurance regulator is also planning to tweak the investment norms pertaining to the life insurance companies, which might give more flexibility in terms of single-company equity exposure limits.
"We are looking at comprehensive norms, which would ensure higher return on investments. The broad parameters will remain the same. There might be some definitional changes, which would allow some flexibility," Narayan said.
Currently, life insurance companies are to invest 50 per cent of their funds in government securities, 15 per cent in infrastructure-related projects and the rest 35 per cent in other-than-approved instruments, which include equities, mutual funds and other money-market instruments.
However, for Ulips, life insurance companies can invest their entire corpus in equities.