The Telegraph
Since 1st March, 1999
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Interest rate derivatives for insurers on the cards

New Delhi, Nov. 9 (PTI): Insurance Regulatory and Development Authority is set to allow insurers to invest in interest rate derivatives to cover their risks in a falling interest rate regime.

“We are vetting it and the guideline would be issued shortly,” IRDA chairman C. S. Rao said.

He said the investments in IDR would be allowed only to hedge interest rate risks.

So far, insurers are allowed to invest in central and state government papers, approved securities like “AA” rated corporate debts papers and equities.

The move to allow investment in IRDS comes in the wake of presentation from insurers for some instrument to hedge risks at a time when interest rates have headed southward.

The Reserve Bank of India has drastically brought down its benchmark bank rate to 6 per cent in the last five years, while average yields on 10-year government paper is hovering at lower than 5 per cent.

Insurers, who are selling policies covering the risks for over 30 years, are apprehensive of the future direction of the interest rate.

Absence of long-term debt papers have created a situation where there could be asset-liability mismatch in future if they are not able to hedge the interest rate risks.

Falling interest rates have prompted Life Insurance Corporation to close down or revise some of its earlier high-yielding schemes like Bima Nivesh and Jeevan Shree.

Moreover, the insurance monolith has decided to stop issuing assured return schemes considering the steep slide in interest rates in recent years.

LIC, along with new generation private companies, had pressed for long-term bonds or IRDS to ensure that their future liabilities do not exceed their assets, sources said. Although RBI has come up with 26-year bonds, it was not sufficient for the insurers to cover their risks.

The other alternative was IRDS, which is likely to be allowed for investment by insurers.

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