Page 30 - Insurance Times April 2022

Simultaneously the funds under the custody of insurers too with respect to shareholders funds. The prescribed systems
have grown more than 1100 times. The Table I above clearly and procedures are devised to take care of the goals of
highlights the role of investment income and investment regulator.
activities in the performance of Indian Insurance Sector. For
last thirty years the mounting underwriting losses have been E. Classification and Segregation of Funds
made up by the investment income of the insurers. The table
also throws light on the over dependence of the industry on and the income earned thereon.
the investment income. It also highlights/underlines the There are two significant streams of inflows which
need for a greater focus on the investment activities, under contribute to funds in the custody of insurers. One from the
the circumstances of increasing losses and falling yields. The policyholders and another from the shareholders. There can
yields have fallen from their high of about 12% in 1990s to be a third stream, flowing from creditors which is most likely,
7% in 2020. The story presented by Table I is retold by Table not so significant. As stated above the funds of the
II in its companywise analysis of data for 2019-20. policyholders is the primary concern of the regulator. Hence
it is expected that the insurers keep these funds and the
C. Objectives (Goals) of Insurers' Invest- income there on, separately from other funds. However for
historical and practical reasons the separation as expected
ment Management seems to be missing in most of the cases. Alternatively the
The insurer has four primary aims/goals in managing these separation is done based on certain acceptable criteria. This
investments. also necessitates apportionment of investment income based
on similar or some criteria. This criteria of separation as well
First, the safety of funds so that they will not have any as apportionment normally gets explained in the accounting
difficulty in meeting their obligations to the policyholders. policies of each insurer. These policies of Indian Non-life
Insurers extracted from Annual Reports of 2019-20 are
Second maximisation of returns which can cushion the reproduced in the Annexure A.
adverse underwriting results of bad years and also for
ensuring good returns to the shareholders. F. Uneven Operational Cash flows
An important distinguishing feature of cash flows in
Third, liquidity, (and ALM) the funds are available as and insurance business is its uneven-ness. Hence cash flow
when required, and management is the first priority of their investment function
Ice employ gainfully the surplus inflows and realise funds
The fourth, compliance with regulatory requirements. when needed during times of deficit flows. In this process
of cash flow management they stand to make some capital
There is likely to be a conflict between the goal of liquidity gains. But at the same time, they are exposed to risk of
and goal of profitability. Insurers are expected to strike a losses due to adverse developments in the market. Apart
balance between them. The processes and systems of from the cash flow management they do get adequate funds
insurers should be robust enough to take care of achieving for long term investments for earning regular income in the
the above goals and also striking of balance between form of interest, dividend and rent. Hence a need for sound
liquidity and profitability. and robust investment set-up.

D. Regulator's Responsibilities
Apart from the goals mentioned in (c) above, the Regulator
has an additional responsibility of directing the investments
into socially desirable sectors. Investment Regulations
attempt to take care of such regulators responsibilities. The
focus of the regulator is the safety of Policyholders funds
(Refer point E below). Therefore Investment of Indian
policyholders funds outside India is barred. Regulatory norms
(prudential and exposure) prescribe investments of insurers
money into safer avenues, and leaves smaller liberty
(increased from 25% to 55%) for insurers in managing these
investments of policyholder funds. There is greater liberty

30 The Insurance Times, April 2022