The life fund represents the
accumulated liabilities of the insurance company towards policyholders and is
to be kept as trust money. The company invests it to earn the assumed interest.
The supreme consideration in the investment of life fund is to preserve the
interest of the policyholders. Principles of Investment- The following are the
basic principles or canons of investment policy for an insurer: (I) Safety and
Security- The primary purpose of investment of life fund is not to earn
profits, as the insurer is merely a trustee, but to maintain complete security.
Therefore, the securities in which it may be invested should never at any time
fall in their face value.
According to statutory guidelines (amended), the
insurer is required to invest the life fund in the following manner: At least
25% in Government securities; Another 25% either in Government securities or
other approved securities;. . This could be used to meet a sudden contingency
or to avail of an exceptional investment opportunity. (III) Profitability- The
insurer must earn at least the assumed rate of interest otherwise there will be
a loss. The investments should be made in such securities which can yield the
highest return but not at the cost of safety. It has been realized that safety
and profitability are apposed to each other and so a fair and balanced policy
of investment should be observed. (IV) Diversification- The investment of the
funds should be diversified. It means spreading over investments among
different classes of securities so that risks and returns are adjusted. The
diversification can be according to time factor. It provides maximum security
and yields an efficient rate of return.
So the principle of “not having all one’s eggs in one basket” should be adopted.
(V) Aid to Life Business- The funds should be invested in those projects or
activities which may provide more and more employment opportunities and may
also increase the standard of living of the people, so that the insurer can get
the benefits of the lower mortality rate and increase in new business.
VALUATION- The term ‘valuation’ has been defined as a periodical examination of
the financial position of an insurance company meant to judge the adequacy of
the insurance fund and to calculate its profit or loss. It is used for
comparing the actual results of mortality experienced, interest earned and
expenses incurred with the predetermined figures. It also helps in the
calculation of any surplus which might be available for distribution as profits.
According to Section 28 of the Life Insurance Act 1956, 95% of the profit of
life insurance must be distributed to the policyholders by way of ‘Bonus’ on
with profit policies and the remaining 5% has to be utilized for such purpose
as the Government may determine. The valuation process: The Valuation process
involves the following steps- (I) Calculation of Net Liability- In life
insurance, the claim must arise either on the death of the assured or expiry of
the policy period. The difference between the present value of the future
premiums to be received and the present value fo future liability on all
policies in force is to be taken as “Net liability” for life insurance
companies. The calculation of net liability on all outstanding policies is done
by experts called ‘actuaries’. The LIC of India makes the valuation of its net
liability every two years. The process by which net liability is determined by
an actuary is called actuarial valuation. (II) Calculation of Life Assurance
Fund- The difference in Life Revenue account is to be taken as closing balance
of the Life Assurance Fund.
In other words, the excess of income over
expenditure of a life insurance business during the current year is merged into
reserve called Life Assurance Fund. (III) Calculation of Surplus or Deficiency-
The final stage in the valuation process is ascertainment of surplus or
deficiency. The comparison of net liability with life assurance fund will
reveal surplus or deficiency. If the former is less than the latter one,
surplus is created and when the former is more than the latter, deficiency is
arrived.