Bases for Formulating Investment Policy in Life Insurance

1. Basic Principles

The safety, profitability, liquidity, diversification and aid to business are guiding principles for formulating the investment policies.

These principles vary according to the nature and size of business. However, basically, these principles have to be, applied for proper investment policy.

2. The Outlook of Management

Apart from the basic principles, the investment portfolio is affected with the attitude of the management of the concern.

If the management wishes to earn maximum profit, investment will be made in high-yielding securities than in safe securities.

The sound and effective management will always try to invest in safe and constant earning securities.

3. The Present Composition of Investment Portfolio

Where the present composition of investment portfolio shows heavy concentration on government securities, fresh investment may be made in industrial securities.

An effective investment policy will have to establish a proper balance between all types of investment channels.

4. Present Position of the Insurer

Investment of the insurer is affected mostly with the size, age, capital and progress rate of the business. For example, new insurer must see safety to the maximum level while the established concern may invest in high-yielding security.

5. Availability of Suitable Securities

When the most suitable securities are not available, investment will have to be confined to the next suitable investment. The requirement of time may also bound the investment portfolio, e.g. during war period, government securities are considerably used.

6. Adequacy of Funds

If there is adequate fund with the insurer investment may be made in high-yielding securities and if funds are insufficient, safety principle is the most considerable factor.

7. Socio-Economic Needs

Bailey had also suggested that investment must be made according to the social and economic requirement of the society. It has been discussed earlier that for meeting social objectives, investment, sometimes, is made even in low yielding securities.

8. Environment of the Country

Political and economical environment of the country also affect the investment portfolio.

International and national relationship are also taken into account while investing the funds.

9. Limitation of Investment

Investment of funds is subject to two limitations:

(a) Legal
(b) Self-imposed

(a) Legal Limitations

It can be of two types:

(i) Quantitative
(ii) Qualitative

(i) Quantitative Limitation

The quantitative aspects of investment regulations stem from the specification of eligible types of investment and the minimum quality criteria for individual investments within the eligible categories.

(ii) Qualitative Limitation

Limitations may be imposed on the amounts that can be placed in eligible investments. For example, in India at least 50 per cent of the controlled funds should be invested in government securities.

(b) Self-Imposed Limitation

Life insurers also place limitation on their investments which is determined by the tradition and outlook of management. These limitations may change from time to time.