Insurance Regulatory and Development Authority Lets Insurance Providers to Hedge Interest Rate Risks

Participation in interest rate derivatives would aid such companies by shielding their return from fluctuation in the interest rates and would also protect financial health. IRDA recently gained recognition by allowing insurance companies to hedge their interest risks by participating in interest rate derivatives of a longer tenure.

Read more
Get ₹1 Cr. Life Cover at just
Term Insurance plans
Online discount
upto 10%#
Claim Support
Policybazaar is
Certified platinum Partner for
Claim Settled

#All savings and online discounts are provided by insurers as per IRDAI approved insurance plans | Standard Terms and Conditions Apply

Get ₹1 Cr. Life Cover at just
View plans
Please wait. We Are Processing..
Get Updates on WhatsApp
By clicking on "View plans" you agree to our Privacy Policy and Terms of use
We are rated
58.9 million
Registered Consumers
26.4 million

According to the present norms, insurance providers are permitted to enter Forward Rate Agreements (FRAs),Interest Rate Swaps (IRS) and Exchange Traded Interest Rate Futures (IRF) with a maximum tenure of one year.

Participation in interest rate derivatives would aid such companies by shielding their return from fluctuation in the interest rates and would also protect financial health.

All insurers are welcoming this move. It is going to help insurance companies in hedging their long-term interest rate risks.

Several products of insurance companies offer guaranteed return. However, because of fluctuation in the interest rates, returns can slump. This can put pressure on the finances companies.

Companies get into these agreements to hedge the interest rate risk on investments and the forecast transactions. Hedging interest rate risk of investment in fixed income securities would include fixed income derivative positions that are designed to negate the potential losses from present fixed income investments of them

After putting conditions, the guidelines said, a participant's dealings in interest rate derivatives would not go beyond an outstanding notional principal amount equivalent to 100 per cent of the book value of the fixed income investments of the insurance company under the policyholders fund, it said.

ULIP funds in case of life insurers and the shareholders funds taken together would be excluded.

The mark-to market gain or loss arising out of the effective hedge would be solely taken care of by the respective fund only.

There won't be entry of any contracts with promoter group entities either directly or indirectly.

The guidelines are quite comprehensive and there is a good amount of checks and balances so that insurance companies do not run into the risk of overexposure of such instruments.

The guidelines stated that the board would make sure that the Rupee Interest Rate Derivatives are good enough for the portfolio handled by the insurer and the liabilities undertaken.

Requirement is felt to establish risk measurement methodologies which are consistent with the nature and scale of the derivatives activities.

The initiation of the policy is the responsibility of the investment committee with an oversight by the board of directors.

While handling such potentially complicated products the board and the senior management of insurance company should understand the nature of the risk undertaken, complexities involved, stress levels etc.

To lessen the risk, contracts have to be verified at regular intervals at least once in a year.

Different types of Plans

Life insurance articles

Recent Articles
Popular Articles
Life Insurance for Gig Economy

16 Mar 2023

A gig economy is a free marketplace in which temporary positions
Read more
Is Life Insurance Mandatory for a Home Loan?

16 Mar 2023

Due to the increase in housing costs, it is now nearly difficult
Read more
SBI Life Insurance 40000 per year Plan for 10 years

06 Mar 2023

A SBI Life Insurance 40000 per year Plan for 10 years is a life
Read more
SBI Life Insurance 50000 per year Plan for 10 years

06 Mar 2023

SBI Life Insurance company offers a comprehensive range of life
Read more
SBI Life Insurance 7-year Plan Maturity Calculator

28 Feb 2023

An SBI life insurance can not only help you create a corpus in
Read more
How to Check LIC Policy Status, Details, Statement via Online/SMS/Call
Last year, Mr. Rajiv Verma bought a Child LIC policy to provide financial security for his kid's future. However
Read more
How to Cancel SBI Life Insurance Policy?
As per the Insurance Regulatory and Development Authority, you can cancel a life insurance policy taken within 15
Read more
SBI Life Insurance 50,000 per year Plan for 5 Years
Life insurance is not only about the financial protection of the family but also about working for life’s
Read more
Life Insurance Claim Settlement Ratio
Claim settlement ratio is one of the important parameters that one should consider while deciding on the insurer
Read more
PLI Santosh Maturity Calculator
Maturity calculators have proven to be one of the simple tools for digital-savvy insurance buyers. Postal Life
Read more

View Plans
Download the Policybazaar app
to manage all your insurance needs.