Insurers step up their hedge game amid 2025 volatility
Greater household affluence and heightened risk awareness are two factors that are accelerating demand for both life and non-life products. But as portfolios grow and equity allocations deepen, so too does the exposure of those same insurers to global volatility. Protecting value in this climate requires moving beyond static asset management towards more dynamic risk governance.
It is against this backdrop that IRDAI has permitted insurers to use equity derivatives to hedge market exposure. The reform was timely. But the bigger question remains: is the industry moving fast enough to operationalise this? Indian insurers have increased their exposure to equity markets over the past decade, particularly through Ulips and longer-dated retirement products. This shift, while positive for long-term returns, can expose portfolios to market shocks. As evident in recent events, these can easily be triggered by geopolitical conflicts, macroeconomic shifts or regulatory developments, domestically or abroad.IRDAI's recent decision gives insurers another tool. But tools don't mitigate risk, systems do. The ability to respond to market stress hinges on infrastructure: precision in hedge construction, oversight through real-time visibility, and compliance that ensures every trade is auditable and aligned with accounting norms.The volatility seen in recent months has begun to stress-test institutional portfolios. Insurers who have translated IRDAI's reform into integrated risk systems are better positioned. Those still reliant on manual processes or fragmented data flows may find this challenging.Real-time mark-to-market (MTM) capture, hedge effectiveness testing and automated documentation are not just risk management tasks - they're governance imperatives. They enable boards, regulators and investors to trust that the hedging strategy is not just permitted, but precise.
Over the past decade or so, Indian insurers have fine-tuned their technological capabilities, investing heavily in digital delivery, claims settlement and underwriting. The enhanced hedging imperative could trigger a significant reconfiguration of insurers' investment workflows, enabling more sophisticated risk management strategies and dynamic asset-liability matching. Beyond market responsiveness, capital efficiency is increasingly at stake. As India prepares to transition to a risk-based capital regime, the effectiveness of an insurer's hedging strategy will have a direct bearing on its capital charges. Precision in hedge execution can help insurers avoid capital over-allocations for market risk exposures that are otherwise mitigable. And this will, of course, free up resources for innovation and growth.Fortunately, there is a real determination to embrace this change. Most insurers have started upgrading their systems to strengthen their ability to manage risk, comply with regulations and innovate. In an age where headlines move markets, that's a strategic advantage.However, don't mistake this for a technology shift and nothing more. Insurers that invest in these capabilities signal institutional readiness, attract greater investor confidence and align more closely with international best practices.What's at stake is more than regulatory alignment. Insurers who can hedge effectively will deliver more stable portfolio performance, face lower capital charges and enjoy greater stakeholder trust. In contrast, those who delay may face avoidable write-downs, audit flags or reputational risk.
IRDAI's reform opened the door. Global markets have issued a wake-up call and are testing operational responses in real time. Indian insurers must now align their execution with ambition, deploying the necessary tools and infrastructure to hedge risk in real-time, at scale and with confidence. In a world of persistent volatility, readiness is the only real hedge.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.) Elevate your knowledge and leadership skills at a cost cheaper than your daily tea. Inside TechM CEO's 'baptism by fire' and the blaze he still needs to douse
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