Insurance companies in India are pressing for regulatory modifications to enable their participation in the recently launched bond forwards market, a move aimed at strengthening their investment strategies and aligning long-term asset-liability management practices.
Sources familiar with the matter told Bloomberg that industry representatives have submitted a formal communication to the Insurance Regulatory and Development Authority of India (IRDAI), calling for adjustments in the treatment of accounting standards and counterparty exposure.
The discussions remain confidential, and the IRDAI has not publicly responded to the request.
The bond forwards market, launched last week, has yet to see its first trade. Market participants indicate that several insurers are awaiting board-level authorisation before entering the market.
These financial instruments, which establish a fixed future price for the purchase of government securities, are viewed as potential tools for managing interest rate risk and meeting the long-term payout obligations of insurers.
According to Bloomberg, insurers’ proposals include easing the current “day-zero” accounting rule, which mandates recognition of potential losses from the onset of a trade. Companies are also seeking a change in how counterparty credit risk is calculated, proposing the use of residual maturity to determine exposures, which could reduce compliance pressures.
Additionally, insurers are requesting regulatory clearance to implement netting arrangements when settling trades with counterparties – a practice that consolidates multiple obligations into a single position and may reduce operational risk.
While forward rate agreements (FRAs) have traditionally been used by insurers, bond forwards offer a different structure through the physical delivery of securities. This aspect is viewed as beneficial for long-term investors in aligning assets with their liability timelines.
Churchil Bhatt, executive vice president of investments at Kotak Mahindra Life Insurance, said the instruments could serve multiple functions. Bond forwards help insurers manage interest rate movements while enabling them to secure long-term holdings.
The Reserve Bank of India (RBI) has approved the use of these instruments by banks, allowing them to hold long positions without restriction, although short positions must be hedged. Insurers are expected to become key participants as they expand holdings in government debt amid growing market participation.
Estimates suggest that insurers are planning to shift up to ₹3.5 trillion (approximately US$41 billion) in derivative exposure from FRAs to bond forwards. The transition will occur gradually, with companies working alongside the RBI and IRDAI to resolve regulatory and procedural matters.
In parallel with developments in the derivatives market, India’s government has announced an increase in the foreign direct investment (FDI) cap for insurance firms from 74% to 100%, subject to conditions that all premiums remain invested domestically.
Finance Minister Nirmala Sitharaman stated during her Union Budget speech that the associated regulatory constraints would be reviewed.
Early this year, insurers submitted proposals to the IRDAI seeking permission to utilise equity options for hedging equity-related risks.
Industry sources said the proposal suggests a phased approach, starting with index-linked instruments and expanding over time.
