Insurance Regulatory and Development Authority is consulting market watchdog Securities and Exchange Board of India before allowing insurers to invest in derivative products while planning to introduce a system of risk-based capital assessment by 2004.

Irda chairman N Rangachary had a brief discussion with Sebi chief G N Bajpai on derivatives in New Delhi last week.

Irda intends to examine the Sebi report suggesting reduction in minimum investment limit in derivatives like futures and options, to Rs 1 lakh (Rs 100,000) from the present Rs 2 lakh (Rs 200,000) for enabling non-institutional investors to hedge risks.

"We will go through the Sebi report on derivatives and then take a decision on allowing insurance companies to invest in derivatives," Rangachary said.

Irda is apprehensive of allowing derivatives as another investment avenue for cash-rich insurers mainly on account of the interest rate risks prevailing in the last few years.

Interest rates fell across the board including that for small savings, Reserve Bank's benchmark bank rate and government papers.

Currently, only banks are allowed to take cover under two products -- interest rate swaps and forward rate contracts. RBI is thinking of introduction of other derivatives like separate trading in interest and principal of securities to enable banks to bridge asset liability mismatches.

Insurers, who also wanted to hedge the risks on interest rate, had approached Irda for allowing derivatives as one of the avenues of investment.