Industry regulator is all set to allow life insurers to invest in equity derivatives. The Insurance Regulatory and Development Authority (IRDA), will allow insurers to invest up to 5% of their equity portfolio in futures and options. So far, they have been allowed to invest only in the cash market. Once they are allowed to invest in equity derivatives, insurers will be able to hedge their equity exposure and protect returns for policyholders.

At present, for traditional policies, life insurers are allowed to invest 50% of their funds in government securities, 15% in infrastructure-related projects, and the balance 35% in equities, mutual funds and other money market instruments. For unit-linked insurance products, or ULIPs, insurers can invest their entire corpus in equities. This means that for traditional insurance plans, insurers can invest up to 5% of their other-than-approved portfolio in derivatives. For ULIPs, the investment limit will be 5% of the entire portfolio.

Through these, insurance firms will be able to protect their equity portfolio from market falls. It’s a form of insurance against a negative event that may cause prices to fall.