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Insurance in India

Insurance in India

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Published by ankita

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Published by: ankita on May 06, 2010
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Investment Management

Investment operations are often considered incidental to the business of insurance, and have traditionally been viewed as secondary to underwriting. In the past, risk management was the most important part of business, whereas today the focus has shifted to fund management. Since investment income is a large component of insurance revenues, skilful and careful management of funds can extend to the company in question a competitive advantage. The prudent deployment of the same is, naturally, a matter of concern for the industry as well as for the government.

Insurance is a business of large numbers and generates huge amounts of funds over time, making its financial muscle very strong. These funds arise out of policyholders\u2019 funds in the case of life insurance, and technical and free reserves in the non \u2013 life segment. The time \u2013 lag between the procurement of premium and the payment of claim provides an interval during which the funds can be deployed to generate income. The power of the sector is evident from the fact that insurance companies are among the largest institutional investors in the world. Assets managed by insurance companies are estimated to account for over 40 percent of the world\u2019s top 100 asset managers. In view of this fact, the investment function has a crucial role to play.

In fact, returns on investments influence the premium rates and bonuses and hence investment income will continue to be important component of insurance company profits. In the life sector benefits of investment profits accrue directly to policyholder when it is passes on to him in the form of a bonus. In the case of the non life sector, the benefits are indirect, mostly by the creation of an investment portfolio.

LIC\u2019s ability to settle policyholders\u2019 claims and maturity benefits (including
bonus and other additions, where they apply) is a function of two elements: one a

\u2018sovereign guarantee\u2019 which applies only to the sum assured and \u2018guaranteed additions\u2019 components in any policy, and two, LIC\u2019s ability to generate profits from its business and pay bonus (in \u2018with profits\u2019 policies) and loyalty additions and final additional bonus. In other words, anything that impacts LIC\u2019s profitability is bound to affect the bonuses and loyalty additions that the corporation pays (Intelligent Investor, 2001).

Objectives of the investment policy

The objectives of an investment policy in insurance are different from other industries in certain aspects. Unlike in other sectors, these investments cannot have the sole object of securing maximum returns. It is to be borne in mind that the insurers are primarily responsible for catering to the insurance needs and not providing funds for economic development. That is just one of the obligations and hence, the performance of the companies cannot be considered simply in terms of investment income. The major source of income of the companies is from premium, which is supplement by income on investments. In view of the worsening profitability experience worldwide, the profitability of the general insurance businesses is being looked at from a different angle. The actual profits that would arise from general insurance business are the extent of the yield that is obtained from the usage of the client\u2019s funds, i.e., the premium. Insurers who are able to collect funds either from direct business or elsewhere, in a short period and deploy them profitability alone can survive in the long run. Similarly, the insurer has to discharge the claims as quickly as possible, without impairing his financial position and hence must maintain a portfolio with an emphasis on liquidity, safety and yield.

Therefore, the insurers have an obligation to invest them prudently with the combined objectives of liquidity, maximization of yield and safety. In this sense, the investment decisions in the insurance sector are not entirely a matter of choice only of the investor. Therefore, the governments or the regulators in all countries

insist on a clear and transparent policy for investment and usually prescribe detailed regulations for the same. Since insurers deal with large public funds primarily in the nature of premiums of the clients or policyholders, entrusted to them in good faith, the safety of the same assumes greater importance. The monies are collected on a long-term contractual basis with the trust that they will be secure with the insurers.

There is some difference in the approach to investment management by the life insurance companies and the nonlife insurance companies. The considerations are different because their requirement of funds and their timing are different. Thus, generally, the liabilities of life insurance companies are of a longer term. The contractual liabilities (for example, liabilities under non profit policies) are fixed and guaranteed. The non contractual liabilities represent with-profit policyholders\u2019 expectations regarding future bonuses, which are akin to a real liability linked to inflation.

The nature of investment:-

The investor has to decide between having sufficient funds that are relatively liquid to settle claims and placing such funds in long-term investments for higher returns. Quality, security and marketability of investments have to be kept in mind with a view to achieving the beat rate of return. However, how effectively the insurance company does this will also depend on the investment norms mandated by regulators.

It is considered that insurance is the business of generating liabilities that must be matched by investment in assets. Hence actuarial experts lay emphasis on anticipation pay out patterns and liabilities. Asset composition is decided after taking into account a safety factor for unexpected losses. Hence, many companies hold an asset mix that is highly liquid and fixed income in nature, and not speculative. They cannot carry therefore; achieve an optimal portfolio mix for maximizing benefits. Such a policy affects their profitability which it is

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