Where do insurance companies typically invest your money and how you know it is safe?

Oct 11, 2019 | 1 month ago | Read Time: 3 minutes | By iKnowledge Team

You occasionally get advice from family and friends to invest in insurance for a secure future. But how does paying monthly premiums to an insurance company secure your future? Will you really get the returns offered in an insurance plan? Well, insurance companies work in a systematic manner to ensure that the premiums they collect get multiplied over the years and give clients the desired benefit.

What do insurance companies offer?

For beginners, insurance firms generally offer two types of insurance plans: General Insurance and Life Insurance. Any financial event that doesn’t come under life insurance is a General Insurance or a non-life insurance event. Examples of General Insurance plans are motor insurance, insurance against property and insurance against theft travel insurance. Life Insurance, simply put, insures the lives of people.    

Depending on the type of insurance plan, the insurance terms and benefits differ. Different insurance schemes are designed by insurance service providers to meet the varying needs of their clients.

How do the insurers invest your money?

What happens inside an insurance company is a smart investment of the crores of rupees that are collected through small premiums by millions of investors. For example, thousands of people invest in a term plan with a coverage of Rs. 10,00,000 for a period of 15 years. Now, the investment experts in the insurance company will calculate the probability of insurance claims every year and the long-term returns from a pool of low risk and diverse financial investment instruments such as government bonds, stocks, debentures and others as approved in the IRDA investment guidelines.

To ensure that funds in insurance companies are invested responsibly, the insurers must follow the Insurance Regulatory and Development Authority (Investment) (Amendment) Regulations, 2001 by the IRDA. These guidelines control the degree of the investments by insurers. For example, the insurers offering life-insurance plans must invest their controlled funds in Government Securities and other approved funds not less than 50%. The freedom to choose the investment route is given to the experts of the insurance companies.

There are several limitations for investments made by insurance companies as per the Insurance Regulatory and Development Authority (Investment) (Amendment) Regulations, 2001. For example, if an investee company belongs to a particular sector, it cannot invest more than 10% in any industrial sector of its total investment exposure to the industrial sector as a whole. These controlled investment regulations make sure that insurers invest in assets that offer maximum value to their clients at minimal risk.

Why invest in insurance plans with confidence?
Insurance Regulatory Development Authority of India (IRDA) regulates the insurance businesses in India. To start an insurance business as per Insurance Regulatory and Development Authority (Insurance Brokers) Regulations, 2002, companies need to have a minimum capital to apply for the role of a direct broker, reinsurance broker or composite broker with IRDA. According to IRDA rules, insurers must maintain a minimum solvency ratio of 150% to reduce the risk of bankruptcy. What this means is that all insurance companies must always set aside the amount that consists of their entire liabilities as well as an additional 50% of that amount.

As per Insurance Regulatory and Development Authority (Assets, Liabilities, and Solvency Margin of Insurers) Regulations, 2000, insurers must present a statement with their Available Solvency Margin (ASM) and Required Solvency Margin (RSM) along with the Solvency Margin Ratio i.e. the ratio of the amount of ASM to the amount of RSM for IRDA assessment. This IRDA regulation ensures that insurers can pay off their debts and money owed to investors in case of a crisis.

To conclude, insurance firms such as Aegon Life operate a diversified investment portfolio to manage your insurance premiums in a safe manner. Why worry when accountable insurance firms are working hard to give you maximum benefits from insurance schemes? Insure yourself and your loved ones for a secure future.


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