vantage point
Drawing a Fine Line
‘Being endowed with huge surpluses, insurers have to ensure profitable deployment of funds. But
should that be a reason for diluting the norms of the underwriting function which is even more
vital?’ questions U. Jawaharlal.
M
anagement gurus preach the
importance of productive
deployment of surplus funds so
that the profitability of a commercial
entity can be augmented. Even when the
actual line of business is altogether
different, managements have to look at
earning suitable income depending upon
the time period that the surplus funds can
be at their disposal. However, experts add
a word in caution against being too
greedy in pursuit of such gains and
emphasize on the ‘risk return trade-off’.
History is witness to several episodes of
the capital itself getting eroded while
chasing huge returns; and thus there is a
huge emphasis on the security of capital
that is primary to investment decisions.
Insurers are in the business of holding in
trust the policyholders’ money and thus
they have a fiduciary responsibility. Even if
the slightest evidence of under-
performance of the managements with
irda journal March 2013
‘Insurance Investments'
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14
- Insurance Investments
regard to the capital gets spread around; it
can lead to jeopardizing their reputation.
Insurance business itself is such that the
leverage for generating huge surplus
funds is high and unless these surpluses
are deployed in a profitable manner, it
would lead to under-utilization of
resources.
There are certain norms that are in place
regarding the various investment
avenues open for the insurers. The risk
return trade-off that we talked about
earlier is certainly the basis for such
mandated investment opportunities and
puts the onus on the management to
ensure that they never transgress the
appointed guidelines. Once these
guidelines are scrupulously followed,
players would automatically be able to
meet their obligations as and when they
fall due; and it is with this agenda that the
investments of insurers are closely
monitored.
in the next issue...
In the real world, it may not be possible for
all the players – however efficient they are
– to generate operating profits year after
year; especially in a domain where
competition is very keen and there is a
tendency to offer huge discounts to grab a
larger share of the business. In such a
scenario, the natural tendency would be
to fall back upon the investment income
to offset underwriting losses. Such trends
are not very healthy for the long-standing
health of the industry although in the
short run, the companies may just
manage to tide over short-term crises. Not
only would such a tendency lead to a fall in
the underwriting standards, it would also
indirectly lead to a sense of being one-up
for players with large investible funds.
‘Insurance Investments’ will be the focus
of the next issue of the Journal and we will
get to see a few experts discussing this
vital management function in detail.