Life insurance: How is the premium invested by insurance companies?

The returns promised on life insurance policies act as positive reinforcement for people to buy them in the first place. But have you ever wondered how the premiums paid by you are eventually invested by insurance companies to generate returns? While Unit-Linked Investment Plans (ULIPs) showcase their portfolios, endowment policies remain largely secretive about it. One doesn’t know their net asset value and how is the premium money utilised finally. You must know that the Insurance Regulatory and Development Authority of India (Irdai) has taken out guidelines on how the policyholder’s money can be invested by life insurers.

Where is my premium invested by insurers?

Irdai allows insurers to invest the premium in various categories of investment instruments. This helps insurance companies to balance risk and reward to maximize the benefits to the policyholders while ensuring the safety of capital.

“Insurers are permitted to invest premium in instruments like Central Government Securities, State Government Securities, Government Guaranteed debt securities, bonds and debentures issued by the Public sector and Private sector companies in India, Listed and unlisted Equity Shares, Preference shares, Immovable properties, Additional Tier I Bonds issued by the Banks, units of Real Estate Investment Trusts, Infrastructure Investment Trusts and Alternate Investment Funds and Fixed Income derivatives for hedging interest rate risk,” said Sunil Sharma, president, chief actuary and CRO at Kotak Mahindra Life Insurance. 

While insurers can invest in listed and unlisted equities, there are restrictions on investing premium in private limited companies and companies registered outside India.

Guidelines for allocating premiums

Irdai has prescribed investment guidelines specifying the type of instruments and allocations for insurance premiums basis the investment products chosen by the policyholder basis their need and risk appetite.

For Life Fund Products

-Minimum 50% should be in the government securities or government-guaranteed securities.

-Total exposure to an entity through debt and equity shall not exceed 10% of fund size.

-Limited exposure to the units of AIFs, REITS, InvITs.

-Minimum 15% investment in Infra debt and equity securities.

Pension, annuity and group gratuity fund products

-Minimum 50% should be in the government securities or government-guaranteed securities.

-Total exposure to an entity through debt and equity shall not exceed 10% of fund size.

Unit Linked Funds

-The asset allocation of Unit Linked Fund is basis the product approval and chosen by the policyholder basis their risk appetite.

-There is no mandatory investment in government securities and infra assets other than fund asset allocation chosen by policyholders.

-Total exposure to an entity through debt and equity shall not exceed 10% of fund size.

Protecting the interest of policyholders

If insurance companies are allowed to invest our premium, what is the need of instilling several regulatory caps on each one of them? Well, it’s done to protect the interest of the policyholder. Irdai aims to never let a policyholder lose money due to these backend investments. The insurance regulatory protects policyholders’ interest by curtailing risk in several ways.

“Irdai makes sure to safeguard the interest of the people by prescribing the minimum investment in government and government-guaranteed securities from non-linked funds. It also doesn’t allow companies to invest in private limited companies to curb further risk. It has limited the single company exposure through all investments including debt and equity. At the same time, it has limited debt exposure to companies that are rated below AA and equity securities those are not having an adequate dividend-paying track records,” Sharma explained.