Insurance Regulatory and Development Authority of India (IRDAI) has issued guidelines permitting insurers to hedge equity portfolio risks using equity derivatives. This decision addresses increasing insurer investments in equities and the associated market volatility. Insurers can now use stock and index futures and put options for hedging, but over-the-counter (OTC) exposure remains prohibited. The guidelines specify fund eligibility, exposure limits, and compliance with SEBI regulations. Insurers must implement a Board-approved hedging policy, conduct risk assessments, and maintain governance oversight. Quarterly reports on hedging activities, derivative turnover, and financial impact must be submitted to IRDAI.
Insurance Regulatory and Development Authority of India
Ref: IRDAI/F&I/GDL/INV/041/02/2025 Dated: 28 February, 2025
To,
All Life, General and Health Insurers
Guidelines on Hedging Through Equity Derivatives
IRDAI (hereinafter referred to as “the Authority”) permitted insurers to deal in financial derivatives in 2004 through Guidelines on Fixed Income Derivatives vide Circular No. INV/GLN/008/2004-05 dated 24th August 2004, which was further reviewed in 2014, for allowing insurers to deal in Rupee Interest Rate derivatives in the form of Forward Rate Agreements (FRAs), Interest Rate Swaps (IRS) and Exchange Traded Interest Rate Futures (IRFs). Besides Fixed Income Derivatives, the Authority also permitted insurers to deal in Credit Default Swaps (CDS) as users (protection buyers) in 2012 vide Circular No. IRDA/F&I/INV/CIR/247/11/2012 dated 27th November, 2012.
Considering the requests from the insurers, increasing trend in investments in equity market by insurers and owing to the associated volatility in the equity prices, a need was felt to permit hedging through Equity Derivatives as a counter measure. Accordingly, the Guidelines on Hedging through Equity Derivatives are hereby, issued under clause 13 of Schedule III of IRDAI (Actuarial, Finance and Investment Functions of Insurers) Regulations,2024.
1. Insurers are hereby permitted to use equity derivatives for hedging their existing equity exposures, subject to compliance with these guidelines.
2. Objectives:
The equity derivatives are permitted for insurers:
2.1 To hedge against volatility in equity market.
2.2 To ensure preservation of market value of equity investments.
2.3 To reduce equity portfolio risk.
3. Permitted Instruments:
Insurers are allowed to use the following exchange traded equity derivatives to hedge their existing positions:
3.1 Stock Futures and Index Futures:
3.1.1 Insurers are allowed to take short positions in Stock Futures and Index Futures to the extent of the existing holding of underlying equities1 in the respective funds.
3.1.2 The short futures position shall be taken within the same fund (segregated Linked fund or same fund / sub-fund within the Life fund or Pension, Annuity and Group fund of the Life Insurers or investment assets of General or Health Insurers) where the underlying equities are held.
3.2 Stock Options and Index Options:
3.2.1 Insurers are allowed to take position of an Option Holder(Buyer) and are allowed to buy only put options of Stocks and Indices against the existing underlying equity holding1 in the respective funds.
3.2.2 The put options shall be purchased within the same fund (segregated Linked fund or same fund / sub-fund within the Life fund or Pension, Annuity and Group fund of the Life Insurers or investment assets of General or Health Insurers) where the underlying equities are held.
3.3 Any Over the Counter (OTC) exposure to equity derivatives is prohibited.
4. Funds allowed to use Equity Derivatives:
The following funds will be permitted to use equity derivatives:
4.1 Unit Linked funds which are allowed to invest in equity instruments; The equity derivative contracts under these funds are to be entered for the new funds launched hereafter and no derivative transactions are allowed for the existing funds under the Unit Linked Insurance Business.
4.2 Life Fund;
4.3 Pension, Annuity and Group Fund;
4.4 Investment Assets of General or Health Insurers.
5. Exposure and Position Limits:
5.1 The total equity derivative positions in a fund (stock futures, stock options, index futures and index options, all put together) at notional value (arrived as per para no. 6) shall not exceed the market value of underlying equities held within the same fund (Segregated fund or same fund / sub-fund within the Life fund or Pension, Annuity and Group fund of the Life Insurers or investment assets of General or Health Insurers) on any day. However, passive breaches, if any, in the said limits are to be corrected within 15 days.
5.2 The aggregate number of Stock Futures contracts and Stock Put Options (i.e. market lots multiplied by number of contracts) shall not exceed quantity of respective underlying held as investment on any day.
5.3 The notional value of hedging through index futures and index put options together shall not exceed 20% (twenty percent) of market value of unhedged portion (market value of equity portfolio minus notional value of individual stock futures and notional value of individual stock options) of equity holding of the same fund on any day. However, passive breaches, if any, in the said limits are to be corrected within 15 days.
5.4 The hedge through index futures / index options will be deemed to be “highly effective” if at inception and throughout the term of the hedge, the ratio of loss on hedging instrument and gain on cash instrument or vice versa is offset within a range of 80 – 125 percent. If the values are outside 80-125 percent range, then the hedge would not be deemed to be highly effective and the hedging position through index shall be unwound and the profit/loss shall be accounted for in the manner as stipulated under Para 9 below. The periodicity for testing hedge effectiveness is to be decided by the board of insurer and the said periodicity shall be at least once in a quarter.
5.5 The equity derivative positions at the aggregate insurer level shall comply with the market wide position limits specified by SEBI / Stock Exchanges, from time to time.
5.6 Position limits for insurers as trading members shall be within the limits specified by SEBI / Stock Exchanges, from time to time.
6. Notional Value of Equity Derivatives:
Each position taken in equity derivatives shall have an associated notional value calculated as under:
| Position | Notional Value |
| Short Stock Future and Short Index Future | (Lot Size) x (No. of Contracts) x (Price of Futures) |
| Stock Put Option and Index Put Option | (Lot Size) x (No. of Contracts) x (Strike Price) |
7. Internal Risk Management Policy and Processes:
7.1 The equity derivatives shall be used only for hedging purpose, against long positions in equities held by the insurer at the time of taking derivative position.
7.2 Exposure to the derivative position taken for hedging purposes shall not exceed the quantity of underlying position against which hedging position has been taken.
7.3 Insurers shall comply with SEBI Regulations / Guidelines / Circulars issued with regard to equity derivatives from time to time.
7.4 Insurers shall also comply with Circulars / Guidelines issued by stock exchanges governing the functioning of derivatives.
7.5 Before taking exposure to equity derivatives, Insurers shall put in place Board approved Hedging Policy (for Equity Derivatives) which, interalia includes Hedge Accounting framework and detailed methodology for determination of hedge effectiveness, indices to be used for hedging and rationale for selecting such indices, etc.
7.6 Insurers shall ensure that hedge is assessed on ongoing basis and is highly effective throughout period.
7.7 Derivatives cannot be unwound, if it is hedge effective, so long as the underlying exists, nor can it be re-designated or re-deployed for other underlying.
7.8 If the underlying is sold, the hedge must be unwound immediately.
7.9 Insurers shall ensure staff dealing in equity derivatives are trained and transactions are carried out in a prudent and effective way.
7.10 Insurers shall establish management responsibilities for the officers dealing in derivative transactions.
7.11 Insurers shall identify various types of risks faced by the insurers such as market risk, liquidity risk etc. and establish a clear and comprehensive set of limits to control those risks.
7.12 Insurers shall lay down type and frequency of reports for derivative transactions, which are to be presented to the Board (or to the committee(s) of the Board).
7.13 Insurers shall lay down accounting treatment relating to equity derivatives exposures and monitor the impact on solvency / capital due to the use of derivatives.
7.14 The insurers shall have proper Information Technology(IT) policies, process and infrastructure in place before the commencement of Equity Derivative transactions.
7.15 Every insurer before undertaking exposure to equity derivatives, shall carryout the Systems Audit through the Investment Risk Management Systems and Process Auditor, and shall obtain certificate from the auditor stating that suitable systems, processes and control mechanisms are in place to meet the requirements of these Guidelines.
7.16 The concurrent auditor shall ensure the compliance of these Guidelines on an ongoing basis and shall comment on the same in the quarterly report. The auditor of Investment Risk Management Systems and Process shall also comment on the systems and procedures in their periodical audits.
7.17 The implementation of the policy on derivative shall be the responsibility of the Investment Committee (IC) under the oversight of Insurer’s Board.
7.18 The insurer shall intimate the Authority prior to taking exposure to Equity Derivatives for the first time.
8. Corporate Governance:
8.1 Before taking exposure to equity derivative positions, the Board and the senior management of Insurer shall take note of the nature of the risks undertaken, complexities involved, stress levels etc. Insurers shall at least once in a quarter, report their equity derivative positions / transactions, exposure and position limits compliance to Risk Management Committee. At periodical intervals, the Board shall review the contracts undertaken and satisfy themselves that adequate risk measurement, management policy and procedures & controls for derivative contracts permitted in these guidelines, have been established and are functional and the positions taken on equity derivatives are not prejudicial to the interest of the policyholders.
8.2 The Chief Risk Officer (CRO) of the insurer shall be responsible for monitoring / reporting of all aspects of equity derivative program and shall report compliance to the Risk Management Committee of the Board and also to the Board of the Insurer. Where any particular equity hedging program is not in compliance with the Circular / Guidelines issued in this regard, the CRO shall identify the same and shall take up the non-compliances with the Risk Management Committee.
8.3 Insurers are required to disclose the following in the sales brochure of ULIP (Unit Linked Insurance products) where equity schemes are involved.
i. The intention to trade in equity derivative products;
ii. The risks and returns ensuing from the derivative contracts shall be explained by means of a simple quantitative example;
iii. The losses that may be suffered by the policyholders as a consequence of such investments.
iv. Exposure limits set for the derivative contracts.
9. Accounting for Equity Derivatives and Disclosure:
9.1 All equity derivative contracts shall be recognized on the balance sheet and measured at fair value.
9.2 Linked Business – Unrealized gain or loss arising due to changes in the carrying amount of the derivative instruments shall be recognized in Revenue Account of respective SFIN. The gain or loss emanating from expiry or closure of the derivative contract shall also be recognized in Revenue Account of the respective SFIN.
9.3 Non-Linked Business / General or Health Insurance Business – Unrealized gain or loss arising due to changes in the carrying amount of the derivative instruments shall be recognized under ‘Fair Value Change Account’. The gain or loss emanating from expiry or closure of the derivative contract shall include accumulated changes in fair value previously recognized under “Fair Value Change Account” in respect of particular derivative contract and shall be recycled to relevant Revenue Account or Profit & Loss account, as applicable.
9.4 The accounting for derivative transactions shall comply with the provisions of Schedule II of IRDAI (Actuarial, Finance and Investment Functions of Insurers) Regulations,2024 as amended from time to time.
9.5 The insurer shall disclose a statement of exposure through Equity Derivatives under the Notes to the Accounts in the financial statements covering the following:
9.5.1 Insurer’s financial risk management objective, in particular its rationale for hedging equity portfolio;
9.5.2 Hedging Strategy;
9.5.3 Accounting Policy.
Statement of Exposure Through Equity Derivatives
(Rs. In lakh)
| Name of the Fund | Market Value of the Equities held in the Fund | Notional Value of Equity Derivative positions (Stock Futures plus Stock Options plus Index Futures plus Index Options) |
Percentage of Notional Value of Equity Derivatives Position to the Market value of Equities held in the portfolio Fund |
10. Quarterly Reporting to the Authority:
10.1 Total Hedging Position through Equity Futures and Options as on reporting date (for each fund separately):
Rs. In lakh
| Name of the Fund (For ULIP – SFIN wise) | Market Value of the Equities held in the Fund |
Notional Value of Equity Derivatives positions (Stock Futures plus Stock Options plus Index Futures plus Index Options) | Percentage of Notional Value of Equity Derivatives Position to the Market value of Equities held in the Fund |
10.2 Hedging through Stock Futures, Short Position – Scrip wise details as on reporting date (for each fund separately):
Rs. In lakh
| Name of Fund (For ULIP – SFIN wise) | Underlying (Name of the Scrip) |
No of shares held | Market value of shares held |
Total Number of Stock Futures (No. of Contracts x Lot Size) | Notional Value of Stock Futures |
Margin Maintained |
10.3 Hedging through Stock Put Options – Scrip wise details as on reporting date (for each fund separately):
Rs. In lakh
| Name of Fund (for ULIP – SFIN wise) | Underlying (Name of the Scrip) | No of shares held | Market value of shares held | No. of Put Options Purchased (Lot Size) x (No. of Contracts) | Notional Value of Put Options | Option Premium Paid |
10.4 Position of Scrip wise hedging as on the date of reporting (for each fund separately):
(Rs. In lakh)
| Name of Fund (for ULIP – SFIN wise)
|
Underlying (Name of the Scrip) | No of Shares Held [A] | Short Stock Futures (No. of Shares) [B] | No. of Put Options Purchased (Lot Size) x (No. of Contracts) [C] | Total number of shares hedged [D] = [B] + [C] | Total number of shares unhedged [A] – [D] |
10.5 Hedging through Index Futures – Index wise details as on reporting date (for each fund separately):
Rs. In lakh
| Name of Fund (for ULIP – SFIN wise) | Index | Total Volume (Lot Size) x (No. of Contracts) | Notional Value of Index Futures | Margin Maintained |
10.6 Hedging Through Index Options – Index wise details as on reporting date (for each fund separately):
Rs. In lakh
| Name of Fund (for ULIP – SFIN wise) | Index | No. of Index Put Options Purchased (Lot Size) x (No. of Contracts) | Notional Value of Index Put Options |
Option Premium Paid |
10.7 Fund wise hedging position through Index Futures and Index Options Vis-à-vis Unhedged Equity Portfolio as on the date of reporting:
(Rs. In lakh)
| Name of Fund (for ULIP – SFIN wise) |
Market value of Equity in the Fund as on the Reporting Date [A] | Notional value of Stock Futures on Reporting Date [B] |
Notional Value of Stock Put Options as on the Reporting date [C] | Unhedged Portion [D = A-(B+C)] | Total Notional value of Index Futures and Index options [E] |
Percentage of Notional Value of Index Futures and index Options to Unhedged Portion of Equity [F= E/D*100] |
Further, insurers are required to report the following on quarterly basis.
i. Derivative Turnover data;
ii. Data pertaining to Unwinding of Equity Derivative Contracts;
iii. Profit/Loss booked on Equity Derivative transactions
These guidelines are issued with approval of the Competent Authority.
Sd./-
Ammu Venkataramana
General Manager
Notes:
1 Refer para 3.1.1 and 3.2.1 :Stocks Lent under SLB are to be included for the calculation of existing equity holdings.
