Last July, ISVAP, the supervisory authority for insurance companies, enacted provisions on the use of derivatives by insurance companies which will enter into force as of October 1 1996. Any financial instrument the price of which is related to the value of one or more activities or indices is considered a derivative product irrespective of the way it is described.
An insurance company can invest in derivatives even if they are not traded on a regulated market provided in this case that they are dealt on a market offering adequate liquidity and the relevant contract is entered into with regulated counterparties. The use of derivative products is strictly supervised and must, among other things:
- be used for the purpose of reducing investment risks or maintaining profitable portfolio management;
- have a clear technical and financial link with assets whose specific purpose is to cover technical reserves or which are designated for such purpose in the event of transactions entered into for the purchase of financial instruments; and
- have underlying assets which may be used to cover technical reserves or indices based on such assets.
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