In earlier days a policyholder would never appear to be concerned about where his premium gets invested. Life Insurance Corporation was the only life insurer then and it was looked upon as quasi government. But that's not the case now.
In five years since the sector was opened up, 13 private sector life insurance companies have set up operations and some have grown large. It's then natural that policyholders should be wondering where the premium they pay goes.
The premium paid by policyholders certainly cannot be enough to meet claims. The only way to meet claims for an insurance company is through earnings made from investments. It's common knowledge that there is a risk involved in any investment.
So, how do life insurers manage policyholders' funds? The Insurance Regulatory and Development Authority is responsible for ensuring that the investment function of insurance companies serves their role as protector of policyholders' interests. IRDA has, therefore, set out regulations for investment and exposure norms.
Unlike unit-linked insurance products there is no transparency as far as the performance of the investments made for non-ULIP insurance plans. Not less than 50 per cent of policyholders' funds, excluding the funds relating to pension and general annuity business and ULIPs, have to be invested in government securities and other approved securities.
Of this, investment in government securities alone should not be less than 25 per cent. At least 15 per cent has to be invested in infrastructure and social sector.
The remaining 35 per cent is to be invested in other investments to be governed by exposure norms. Of this, investment in "other than approved investment" category cannot exceed 15 per cent of the fund.
What are approved investments?
All secured loans, secured debentures, secured debt, shares and preference shares and debt instruments issued by all-India financial institutions recognised by the Reserve bank of India.
Deposits with banks, commercial papers with a rating of "very strong" or more, treasury bills issued by RBI.
What are other than approved investments?
Investments that do not fall under the approved investments would be treated as "other than approved investments".
Key Conditions
There are certain key conditions for investments. Insurance companies cannot invest in any instrument that is rated less than "AA". To meet investment guidelines, life insurers can invstment in A+ rated papers with the approval of invstment committees provided no AA instruments are available for investment in the market.
Exposure norms
Exposure to a company cannot exceed 10 per cent of the paid-up share capital, free reserves and debentures/bonds or 10 per cent of the funds of the insurer, whichever is less.
Exposure to any industrial sector cannot exceed 10 per cent of the total investment that is subject to exposure norm. Investments in equity shares, preference shares and convertible debentures cannot exceed 50 per cent of these investments.
Further, life insurers also have to ensure that investments in immovable properties do not exceed 50 per cent of these assets.
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