Strict rules on solvency and audits, along with checks on the returns offered, make your insurance money safe
While the life insurance industry has often been criticised for delivering low returns to policy holders, they are still extremely safe investment options.
This is because of the strict regulations and multiple safeguards that have been built into the regulations, more so with the advent of private insurers.
Stiff requirements
It is mandatory for each private insurer to deposit an amount of ₹100 crore as paid-up capital with the Reserve Bank of India prior to the grant of a licence by IRDA (in collaboration with a foreign partner).
It is mandatory for each private insurer to deposit an amount of ₹100 crore as paid-up capital with the Reserve Bank of India prior to the grant of a licence by IRDA (in collaboration with a foreign partner).
The maximum extent of equity in the paid-up capital cannot exceed 26 per cent and no amount can be invested outside India.
Secondly, every life insurance company needs to keep a solvency ratio of at least 150 per cent. That is, it needs to maintain the value of its assets above 50 per cent of its liabilities to ensure that the company has the ability to pay out claims in case of unforeseen events.
Thirdly, every insurer, in respect of all the insurance business transacted in India, has to submit a balance sheet and revenue account at the end of each financial year, clearly indicating its financial health and a valuation of its liabilities.
All these documents are subject to audit by a certified auditor. An Actuarial Valuation Report is also required to be submitted to IRDA. In addition to this, each company goes through multiple audits during the year.
Safe instruments
Besides stiff regulatory requirements on running an insurance company, rules on investment of the premiums received also ensure high safety.
Besides stiff regulatory requirements on running an insurance company, rules on investment of the premiums received also ensure high safety.
Consider this. In case of traditional plans, 85 per cent of the premium collected by any insurer in a financial year has to be invested in Central government, State government and other approved infrastructure bonds and securities. The remaining 15 per cent can be invested by the company at its own discretion.
With such a high percentage of money invested in government securities, these plans deliver low returns.
Banks are comparatively more flexible in the way they use or invest your money, even giving it as commercial or personal loans. Thus, in the shorter run, they may offer comparatively better returns.
It is important not to confuse traditional plans with Unit-Linked Insurance Plans (ULIPs). ULIPs are more flexible, as where your money is invested here depends on the option you choose.
So if you choose a debt fund, the majority of your money will get invested in corporate debt, but if you choose equity, a greater portion of your money will go into the stock market. Here the returns could be much higher, but it involves a higher risk factor too. While investments in safe instruments mean lower returns, there are several checks and balances to ensure that the investor is not cheated.
Checks and balances
For example, non-participating traditional plans generally offer a guaranteed tax-free return of 4 to 6 per cent.
For example, non-participating traditional plans generally offer a guaranteed tax-free return of 4 to 6 per cent.
In case of participating policies, the returns are not guaranteed, but a minimum of 90 per cent of the profits (surplus) generated every year have to be compulsorily distributed amongst the policyholders in the form of a bonus.
Simply put, this means that in case a company earns 8 per cent returns in a year, at least 7.2 per cent of the yield has to be given to policy holders.
Also, there is a check on management expenses. The maximum expenses of an insurance firm cannot exceed 15 per cent of the total earnings in a year. This ensures that it does not overspend your money.
Contractual obligation
An insurance company which has started its operations in the country is not allowed to shut down completely. In case it is unable to sustain its business in India, it can hand its assets over to some other company. There is no scope for a policyholder to be left as an orphan.
An insurance company which has started its operations in the country is not allowed to shut down completely. In case it is unable to sustain its business in India, it can hand its assets over to some other company. There is no scope for a policyholder to be left as an orphan.
Also, since insurance is a legal contract, the policy money has to be paid on the occurrence of mentioned events in the contract. Moreover, in case of any dispute, a policyholder can approach an Insurance Ombudsman and thereafter, a court of law, if the award passed by the Insurance Ombudsman is not satisfactory.
Although all these rules envisage maximum protection to the insured, it is still better for you to choose companies which are known to be run better.
Don’t always go for the one offering the lowest insurance rates, as that can be a high-risk strategy. In this light, LIC is the only institution which carries a central government guarantee for the money due.
The writer is Managing Director, Bajaj Capital
