Basic Sources of Insurance Fund and Investment– In a general point of view, sources of insurance funds imply different ways by which insurance companies race money to pay the bills of the insured after the expiration of the contract agreed period.
Also, the fund could be seen as some of the money saved or made available for a particular purpose.
An insurance fund, therefore, is that particular amount of money reserved or kept by the insurance company in other to achieve a stated objective or purpose.
Investment is a commitment of money in a series of projects over a period of time, made with the hope of allowing money to grow.
Basic Sources of Insurance Fund and Investment
Meanwhile, the fund which the insurers accumulated from various sources, some of which are.
i. Premiums: The premiums called by insurers can also be considered as one of the major sources of funds. This premium may likely be single, level premium, or annuity considerations.
When these premiums exceed the needed premium for meeting claims and incurred expenses is the source of fund.
ii. Interest: In most cases, the assumed rate of interest over the excess interest earned can be a source of funds. The proposed rate is lesser than the actual rate in most cases in turn, the funds will decline.
iii. Capital Gain: The sales of share capital, debentures, and other capital gains can also be a way of sourcing insurance funds.
iv. Saving in Expenses: Savings in expense loadings, bonuses, loadings, or mortality savings are also contributing to the funds of the insurers.
v. Non-Payments of Claims: In pure endowment or term insurance. the claim may not arise, therefore, the premiums paid for such benefit are saved.
Sometimes in certain cases, the claimants do not come for payment at all. thus, they saved money also from a part of the funds of insurers.
Investment of Insurance Fund
Insurance funds may be invested in another sector of the economy for the following reasons:
1. Payments of claims: The payments of insurers’ claim amounts whenever they arise is the first and most important duty of the insurer. For this, the insurer is getting a substantial amount in form of premiums and has to pressure them for payment later on. To keep such an amount idle will be a failure on the part of the insurer who is expected to invest them on behalf of policyholders.
2. To Avoid Financial Deficit: The total income of the insurer may reduce drastically of its requirement if not properly invested this is because a particular rate of interest on its investment has been assumed while calculating the rate of premium.
Again, if funds are not invested and interest not earned, it would be an underestimation of its future liability which may prove disastrous at the time of higher mortality.
3. National Interest: A huge fund of the society is taken by the insurers in form of premiums. Therefore, it is essential for the insurers to invest the funds for the economic development of the nation.
Canons of Good Investment
A good investment must have the following:
d. liquidity. etc.
Safety: The securities in which the funds of the insurer are to be invested should never at any time fall in their face values. Otherwise, the liabilities will be more than its corresponding assets. The primary purpose of investment is not to earn maximum profit but to maintain complete security.
Profitability: The insurer must earn at least the assumed rate of interest otherwise he will suffer loss. The investment, so, should be made in such securities which yield the highest return consistent with the principle of safety.
Therefore, a good investment must be profit-driving. the insurer can reduce his future premiums by earning higher interest and this will be able to increase his business.
Diversification: In a general point of view, diversification means the spreading of investments over many channels. It provides maximum security with high yield and better liquidity provided the diversification was done taking into account these factors.
Additionally, do not invest all the funds in one place in an industry, insecurity, and for a period of maturity. Investment should spread over the widest possible range to minimize unfavorable advantages.
Liquidity: These show the convertibility of investment into cash without undue loss of capital. The principle is essential because of the immediate requirement of money for payment of claims. However, there is no higher chance of maximum outflow at any time because the maternity, unlike the bank withdrawal, may not fall within a short period.