Introduction:

The investment of insurance funds involves allocating assets from insurance premiums into various
financial instruments to generate returns while ensuring liquidity and managing risk. This process aims
to safeguard policyholders' interests by balancing potential growth with the need for stability and
security. Various strategies, such as diversification, asset-liability matching, and risk management, are
employed to achieve optimal results in line with the insurer's objectives and regulatory requirements.

While calculating premium, it has been assumed that the accumulated premiums are invested. The
funds are invested to earn at least assumed rate of interest. The needs of investment of funds are given
here in brief.

NEEDS OF INVESTMENT

1. Payment of Claims

The first and most important obligation of the insurer is to pay the amount of claims whenever they
arise. For this, insurer is getting a substantial amount in form of premiums and has to preserve them for
payment later on. To keep such amounts idle will be a failure on the part of the insurer who is expected
to invest them on behalf of the policy-holders.

2. To Avoid Financial Deficit

If funds are not invested, the total income of the insurer will fall short of its requirements for meeting its
commitments because a particular rate of interest on its investments has been assumed while
calculating the rate of premium. Again, if funds are not invested and interest not earned, it would be an
under-estimation of its future liability which may prove disastrous at the time of higher mortality.
3. National Interest

A huge fund of the society is taken by the insurers in form of premiums. Therefore, it is essential for the
insurers to invest the funds for the economic development of the nation.

SOURCES OF FUNDS

The funds with the insurers are accumulated from the various sources, some of which are given below:

(4) Premiums

The main source of funds is the premiums collected by the insurer. The premiums may be single
premium, level premiums or annuity considerations. The excess of these premiums over the needed
premiums for meeting claims and expenses is the source of funds.

(ii) Interest

The second source of funds is the excess interest earned over the assumed rate of interest. The assumed
rates are lesser than the actual rate in most of the cases. In reverse, the funds will decline.

(iii) Capital Gain

Funds obtained from the sale of share capital and debentures are included under capital gains.

(iv) Savings In Expenses

Savings in expense loadings, bonus loadings or mortality savings are also contributing to the funds of the
insurers.

INVESTMENT OF FUNDS

(v) Non-Payment of Claims

In pure cand saved. Sotre insurance, the claims may not arise, therefore, the premiums paid for such
benefits dirency also foctimes, in certain cases, the claimants derefcome for payment at all. Thus, the
saved money also form a part of the funds of insurers.

PROBLEMS OF INVESTMENT

While investing the funds, the insurer will have to face various problems, some of which are given in the
following sections:

1. The main problem of investment is to preserve the interest of the policy-holders. The insurer keeps
the money of the policy-holders as a trust money. To maintain the trusteeship it is essential that the
fund must be invested in such securities which are safe and secured.

2. The payment of the claim amount is the second problem of the life insurer. The insurer must have
sufficient funds to pay the claims. So, the interest earned from the investment must be adequate
enough.

3. The assets of the insurer should be protected from any elements of fluctuations. Therefore, the
insurer must earn sufficient amount to pay its expenses. Moreover, the earning should be constant and
the market price of the securities must not fall considerably.

4. There should be complete good faith of the public in the insurer's management of funds. In case of
doubtful investment the purpose of public may be defeated. The insurer, therefore, may be loosing its
business in future.
5. A great care has to be taken while selecting suitable channels of investment. The principles of
investment should be followed to a considerable extent. Investment should be such that profit thereon
should be maximum without hampering safety and marketability.

THE PRINCIPLES OF INVESTMENT AAB

The canons of investment are safety, profitability, liquidity, diversification and increasing of life business.

1. Safety

The securities in which the funds of insurer is to be invested should never at any time fall in their face
values, otherwise the liability will be more than its corresponding assets. The primary purpose of
investment is not to earn maximum profit but to maintain a complete security. Therefore, speculative
investments involving possibilities of large profits of large losses are not suitable for life insurance funds.
On account of trusteeship status, the insurer should invest the funds only in sound channels. Security of
principal amount is more important consideration. Therefore, in India, the investment regulations are
made whereby the life insurer is required to invest at least 50 per cent of his controlled funds in
Government Securities.

Safety includes safety of principal amount and interest, thereon. It means that the principal and interest
must not fall, below the expected level at any time. This principle is the keystone of investment.

2. Profitability

The insurer must earn at least the assumed rate of interest otherwise he will suffer loss. The investment,
so, should be made in such securities which yield the highest return consistent with the principle of
safety. The insurer can reduce his future premiums by earning higher interest and thus will be able to
increase his business. It has been realized that the safety and the profitability principles are opposite to
each other. The most safe securities earn little profit and vice-versa is also true. Therefore, the
investment department has to establish a proper balance between safety and profitably. However,
there are certain securities where the safety and the profitability principles are fully observed. Gilt-
Edge-Securities, National-Defence Securities are some of the examples of such securities.

principles of Investment as laid down by Mr. A. H. Bailey

Mr. A. H. Baildisheas actuary of the London Assurance Corporation. He contributed a paper in 1862.
which was published in Journal of Institute of Actuaries, Vol. X. The principles are commonly known
Bailey's Canons' which remain to insurance business today as as much applicable they were in 1862.
However, their mode of application can be changed with the changing conditions. His principles of
investment are summarised as below:

(1) That the first consideration should invariably be the security of the capital.

there in

withdraw

aburity an

(a) That the highest practicable rote of interest be obtained, but that this principle should always be
subordinate to the previous one, ie., the security of capital.

(i) That a small proportion of the total funds (the amount varying according to the individual
circumstances of each case) should be held in readily convertible securities for the payment of current
claims.

(i) That the remaining and much larger proportion may be safely invested in securities that are not
readily convertible.

(v) That as far as possible the capital should be employed to aid the life insurance business.
in cash

COMMENTS ON THE PRINCIPLES

liquidit

speci

1. The presentation of the principles shows that Mr. Bailey was fully aware of the safety, profitability
and liquidity principles but he presented in an exemplary way which did not reveal all scheme of a
picture. He would have presented it in a simple way.

will en

2. He was extra cautious with the negative relationship between the safety and profitability. But there
are certain securities where the safety and profitability principles are fully applicable simultaneously. In
gift-edge securities and postal certificates or national defence bonds may achieve both security of
capital and maximum return. Moreover, Investment Fluctuation Fund may be created for meeting losses
on investments.

3. He put undue stress on liquidity. Liquidity, at least for established concerns, are not very essential
because a vast fund inflows daily to the business in form of premium, return on investment and other
sales proceeds.

litial

Qun
del

200

4. He discussed the principle of diversification in his second, third and fourth principles which can be
given only under one principle of diversification because the diversification may also be according to
profitability and liquidating besides according to class, character and geographical locations.

USEFULNESS OF MR. BAILEY'S PRINCIPLES

Mr. Bailey's principles are as much useful today as were in his time.

1. Security of Capital

As he thought, security of capital is very useful today also, because of fiduciary relationship of the
insurer and insured. Therefore, he pointed out first principle of security in his canons.

2. Profitability

He suggested the second principle only after the first one because he was aware of the negative
correlationship, between high security and high profitability. It is correct in most of the cases even
today. He tried to establish happy balance between the first and second principles. Therefore, he
suggested that a fund should be invested in safe security first and in profitable securities, later on. At
least the assumed rate of interest must be earned to avoid losses.in retur

essential

AVESTMENT OF FUNDS
When the most suitable securities are not available, investment will have to be confined to surtable
investment. The reunites are considerably due bound the investment portfolio, ed war period,
government securities are used

6. Adequacy of Funds

If there is adequate fund with the insurer investment may be made in high-yielding securities and funds
are insufficient, safety principle is the most considerable factor.

7. Socio-Economic Needs

Bailey had also suggested that investment must be made according to the social and econ requirement
of the society. It has been discussed earlier that for meeting social objectives, investimes sometimes, is
made even in low yielding securities.

Environment of the Country

Political and economical environment of the country also affect the investment portfolio, Internation
and national relationship are also taken into account while investing the funds.

9. Limitation of Investment

Investment of funds is subject to two limitation:-

(a) Legal, and

(6) Self-imposed.
(a) Legal Limitations

It can be of two types:-

(i) Quantitative; and

(ii) Qualitative

(1) Quantitative Limitation

The quantitative aspects of investment regulations stem from the specification of eligible types of
investment and the minimum quality criteria for individual investments within the eligible categories

(4) Quantitative

Limitations may be imposed on the amounts that can by placed in eligible investments. For example. in
India at least 50 per cent of the controlled funds should be invested in government securities.

(b) Self-Imposed Limitations

Life insurers also place limitation on their investments which is determined by the tradition and outlook
of management. These limitations may be change from time to time.

INVESTMENT REGULATIONS FOR LIFE INSURERS

The Insurance Regulatory and Development Authority (IRDA) Formulated Investment Regulations in
August, 2000 and subsequently amended them in May 2001. The latest regulations which are applicable
are as per Regulation (3).

S.No.

(1)

(4)

Government Securities

Type of Investment

Government Securities or other approved

Securities (including (1) above)

Percentage

50%

25% Not less then

Contd.The investment of insurance funds involves allocating assets from insurance premiums into
various financial instruments to generate returns while ensuring liquidity and managing risk. This
process aims to safeguard policyholders' interests by balancing potential growth with the need for
stability and security. Various strategies, such as diversification, asset-liability matching, and risk
management, are employed to achieve optimal results in line with the insurer's objectives and
regulatory requirements.