Derivatives are strange instruments indeed. Some countries like them, some don't. Some regulators are against them and others are not. But, nonetheless, Derivatives play a very important part in the overall management of future exposures and liabilities. For the insurance industry that has very long dated liabilities, it does not have sufficient instruments currently to address those liabilities. Investing in Government paper, highly rated debt usually provides low returns. Then, there are also restrictions in types of instruments in which life insurance companies can invest.

But not all this is set to change. "The chairman of India's insurance regulator has indicated that it may relax the ban on life insurance companies investing in derivatives, in a speech at the 14th Global Conference of Actuaries in Mumbai.

According to business daily The Hindu, IRDA chairman J. Hari Narayan said there was a shortage of assets to match the guarantees embedded in insurers' liabilities, meaning that they need derivatives and futures to hedge mis-matching risk of insurance liabilities."

So, going forward, there is a good possibility that companies may be allowed to invest in equity derivatives, credit default swaps and interest rate futures. This will in some form allow insurance companies to strike a balance between assets and liabilities as well as enhance its income on these assets to align with potential liabilities.