A Life Insurance contract is among the longest financial deals that a person ever enters in their lifetime. It is important that you know where your money is going. Do you really get the returns offered in a life insurance plan? Well, insurance companies work in a very systematic manner to ensure that the premiums they receive are invested to be multiplied over the years, giving clients the desired benefit.
The Insurance Regulatory & Developmental Act, 1999 was formed with the sole purpose of promoting and regulating insurance industry in India and protecting the interest of insurers and investors.
IRDA has listed explicit norms for investments by life insurance companies. Following these prudential norms, insurance companies can invest in shares, debentures, but only up to a certain percentage. For example, insurers offering life-insurance plans must invest their controlled funds in Government Securities and other approved funds not less than 50%.
Insurance companies typically function on two dimensions, including underwriting activity which is mainly centered on collecting premiums and second, investment activity which is meant to dispense assets into various investments that earn additional revenues in the form of interests, dividends and capital gains.
The latest Indian insurance sector reforms have built a new competitive environment that has lead to competitiveness for more complex investments, better customer services, innovative products and rapid development of technology.
An insurance company smartly invests the crores of rupees that are collected through premiums by millions of investors. The investment experts working for the insurance company calculates the probability of insurance claims every year and the long-term returns that can be gained from a variety of financial investment instruments such as government bonds, stocks, debentures and others, as approved by the IRDA.
Investment management is of great importance to insurance companies, especially where huge funds are collected as premiums. Since these funds are not immediately required, most companies are able to invest a major chunk of it in investible assets and earn optimum rate of return on it. Investment operation of insurance companies increases the profitability of business, and can reduce the cost of insurance. While making investment, insurance companies are guided by certain fundamental principles:
With an objective to provide superior risk adjusted returns over the long term, IRDA regulates the investment practices for the insurance companies in India. To start with, insurance companies need to have a minimum capital and all insurers must maintain a minimum solvency ratio of 150% to reduce the risk of bankruptcy. This means all insurance companies are needed to set aside the amount that consists of their entire liabilities as well as an additional 50% of that amount.
The high competition in the Indian Life Insurance sector have forced companies to follow best practices and maintain a good quality in their portfolio of investments. To conclude, insurance companies such as Canara HSBC OBC Life Insurance operate a diversified investment portfolio to manage your insurance premiums in the safest possible manner. Therefore, you should not worry as they are working hard to give you maximum benefits from insurance schemes that help secure the future of your loved ones.
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