Page 31 - Insurance Times April 2022

G. Components of Investment Income B2 Some companies do not define these funds
There are two distinct components of insurers investment B3 Some define only policyholder funds and balance
income. Constantly flowing regular income of interest, constitute the shareholder funds.
dividend and rent and not so regular and constantly B4 While some use the balances at the beginning of the
(intermittently) flowing income of capital gains. Apart from year, others use balances at the end of the year. And
the capital gains or losses as a result of cash flow some use the average
management, insurers with proper skills can take advantage
of market fluctuations to make some additional income by Though there are differences in the practice of notional
trading in the market. apportionment of investments followed by different
companies, by and large the notional separation has been
Market fluctuations do offer opportunities. However satisfactory without any material distortion. Yet it may be
realization of accumulated appreciation in the values of a better practice to have uniformity in the process of
investments has to be distinguished from the gains arising apportionment. Simultaneously the possibility of actual
from the trading. It can be observed from Table II that the separation of funds needs to be seriously explored.
share of capital gains vary widely (share of capital gains
being 0.01 to 0.55 times of the total investment income) Similar to the segregation of funds, the apportionment of
amongst Indian insurers. Insurers with required skills and Investment Income and Gain too differs in practice. The
resources, may within their available liberty, trade and take apportionment of investment income has an additional
advantage of market movements to improve their dimension of apportioning the income to revenue accounts
performance. for performance assessment of different business segments.
Practices do differ on this count.
H. Industry Practices on Segregation of
Funds and Apportionment of investments 1. Some allocate on actuals
and Investment Income. 2. Some allocate partly on actuals partly apportion on
As stated above the regulator is more concerned about the notional basis
safety of policyholders' funds. Therefore for monitoring the 3. The basis of apportionment too differs. While some
such funds, their investments and the income flowing apportion on the basis of ratio of shareholder and
therefrom, it is necessary to separate them from other policyholder funds (either balance at the beginning of
funds. As stated above again, for historical reasons and for the year, or at the end of the year or average), others
practical purposes the policy holders funds and other funds apportion on the basis of Premium. Even amongst
are not actually segregated by many insurers. To meet the those who use the basis of premium, some use Gross
regulatory requirements, such insurers notionally separate Premium and others use Net Premium as the basis.
the funds, the corresponding investments and the
investment income. The summary of the practices as Uniformirty in the practices is desired and should be
reflected in their Accounting policies are reviewed and attempted to the extent practicable.
summarised below. The relevant extract of the accounting
policies are reproduced in Annexure A In addition the Accounting Policies of few companies are
silent on some aspects of segregation of funds or
The amounts of the funds keep on changing regulary. apportionment of investment income. An explicit policy is
Market values of investments relating to these funds do keep always better than silence as silence gives scope for
changing. These changes add to the complication of precise interpretation.
segregation and apportionment.
Conclusion
The accounting policies present the following scenarios on Thus it is clear that the insurers' and regulator's focus on
segregation of policyholders' and shareholders' funds.
investments is not a luxury or matter of choice, but an
absolute necessity. Standardisation of practice will only go
A. Insurers have actually kept funds separate
a long way in improving the information available to the
B1. Some companies clearly define the constitution and stake holders, enabling them to make more informed and
composition of these funds objective assessment and facilitate better decision making.

The Insurance Times, April 2022 31