AN ANALYSIS OF INVESTMENTS OF INDIAN INSURERS IN THE FINANCIAL YEAR 2012-13

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Even after Liberalization, the Insurance sector remains the key contributory in building the nation in the form of statutory investments made in Central and State Government Securities and in other forms of securities approved by the Insurance
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    AN ANALYSIS OF INVESTMENTS OF INDIAN INSURERS IN THE FINANCIAL YEAR 2012-13 V. PUGAZHENTHI 1  & C. SUNITHA 2   1 Associate Professor of Commerce, Research Department of Commerce, Rajah Serfoji Government College, Thanjavur, Tamil Nadu, India 2  Associate Professor of Economics, Research Department of Economics, Rajah Serfoji Government College, Thanjavur, Tamil Nadu, India ABSTRACT Even after Liberalization, the Insurance sector remains the key contributory in building the nation in the form of statutory investments made in Central and State Government Securities and in other forms of securities approved by the Insurance Regulatory and Development Authority (IRDA). The IRDA prescribes the prudential norms for the investments to be maintained by all Life and Non-Life Insurance companies. Liabilities of life insurance companies are of longer term whereas the liabilities of general insurance companies are primarily of a short term nature. Applying the matching principle accordingly, within the Life segment also, stipulations are given for the Life fund, Pension, General Annuity, Group Fund, and ULIP Funds. The investment norms and the actual amounts of investment by all the insurers till 31 st  March 2013 are analysed in this article. Fund-wise and insurer wise analyses of investments are made separately for the life and non-life insurance category wherein the dominance of the public sector insurers is brought out. KEYWORDS:   Insurance Investment Regulations, IRDA, Approved Securities, Life Fund, Life Insurers, Insurance Penetration JEL Classification: G11, G22, G28 INTRODUCTION The insurance penetration i.e., the ratio of premium to GDP in the year 2012 was 3.96% in India. Similarly, the insurance density i.e., ratio of premium to population stood as 53.2 USD in the same year. In the life insurance business, India ranked 10 th  among the 88 countries, for which data are published by Swiss Re. India ranked 19 th  in global non-life insurance premium. The time to find India in the first five places in both the life and non-life sector is not far away, given the size of population and the pace of penetration. But when the insurance sector grows especially in a liberalized environment there is growing need to check how the people’s fund is prudentially managed and invested. Or, there is every possibility of getting the history repeated, as insurers have gone bankrupt in the pre nationalization era. At this juncture the role of IRDA regulating the investors’ investments gains importance. On the other hand too much regulation may impede the growth of the sector as the investment income is the only major source of revenue to the insurance sector. The Prudent Investment Rule is a legal doctrine which provides guidance to investment managers regarding the standards for managing an investment portfolio in a legally satisfactory manner. If the process followed in making investment decisions is prudent, then the decisions being made are prudent, regardless of subsequent results. In this paper, a detailed analysis of investments of all insurers is described which is preceded by the present norms of investments stipulated by IRDA. BEST: International Journal of Humanities, Arts, Medicine and Sciences (BEST: IJHAMS) ISSN 2348-0521 Vol. 2, Issue 8, Aug 2014, 45-54 © BEST Journals    46   V. Pugazhenthi & C. Sunitha   REGULATION OF INVESTMENTS   The IRDA requires insurers to comply with standards on investment activities. These standards include requirements on investment policy, asset mix, valuation, diversification, asset-liability matching, and risk management. Description Sections 27, 27A, 27B, 28 of the Insurance law and the IRDA (Investment) Regulations, 2000 lay down the framework for the management of investments including exposure limits and the guidelines for determining the market value of securities. IRDA (Preparation of Financial Statements and Auditor Report of Insurance Co) Regulations, 2002 laid down the norms for valuation of assets. Currently, the insurance sector is guided by limits in investment in individual categories of securities, limits in single company exposure, limits in investment in initial public offers of the companies, different exposure limits for private sector and public sector companies, perpetual debt securities, securitised assets like pass through certificates and asset backed securities and venture capital funds among others. All insurers are obliged to adhere to the pattern of investments as stipulated above. Life Business  Every insurer carrying on the business of life-insurance shall invest and at all times keep invested his controlled fund in the following manner: Table 1: Investment Regulations of IRDA for Life Fund No Type of Investment Percentage i) Government Securities Not less than 25% of the fund, ii) Government Securities or Other approved securities Not less than 50% of the fund,, iii) Approved Investments : Approved Investments and other investments (Other Investments shall not exceed 15% of the fund) Not Exceeding 35% of the fund Investment in housing and Infrastructure by way of subscription or purchase of: Bonds/Debentures of HUDCO and National Housing Bank Bonds/Debentures of Housing Finance Companies either duly accredited by NHB or guaranteed by Government or carrying a current rating of not less than AA by a SEBI registered credit rating agency Not less than 15% of the fund if (iii) b) and c) taken together. Investment in infrastructure by subscription or purchase of Equity/Bonds/Debentures and Asset Backed Securities Source:  IRDA (2008), Insurance Regulatory and Development Authority (Investment) (Fourth Amendment) Regulations Pension and General Annuity Business Every insurer shall invest and at all times keep invested assets of Pension Business and General Annuity Business in the following manner:- Table 2: Investment Regulations of IRDA for Pension & Annuity Fund   No Type of Investment Percentage i) Government securities, being not less than 20% Ii) Other approved securities inclusive of (i) above, being not less than 40% iii) Balance to be invested in Approved Investments. Governed by Exposure/ Prudential Norms. Not exceeding 60% Source:  IRDA (2008), Insurance Regulatory and Development Authority (Investment) (Fourth Amendment) Regulations  An Analysis of Investments of Indian Insurers in the Financial Year 2012-13   47 Unit Linked Insurance Business Every investor shall invest and at all times keep invested its segregated fund of Unit Linked Insurance Business as per the pattern offered. But the total investment under the category other investments shall at no time exceed 25% of the funds. General Insurance Business  Insurer carrying on the business of general insurance shall invest and at all times keep invested his total assets in the manner set out below: Table 3: Investment Regulations of IRDA for General Insurance Business   S. No Type of Investment Percentage i) Central Government Securities not less than 20% of investment assets ii) State Government securities and other Guaranteed securities including (i) above not less than 30% iii) Approved Investments : a) Approved Investments and other investments (Other Investments shall not exceed 25% of the fund) Not Exceeding 55% b) Investment in housing and Infrastructure by way of subscription or purchase of: Bonds/Debentures of HUDCO and National Housing Bank Bonds/Debentures of Housing Finance Companies either duly accredited by NHB or guaranteed by Government or carrying a current rating of not less than AA by a SEBI registered credit rating agency Asset Backed Securities with underlying housing loans not less than 5% c) Investment in infrastructure by subscription or purchase of Equity/Bonds/Debentures and Asset Backed Securities not less than 10% Source:  IRDA (2008), Insurance Regulatory and Development Authority (Investment) (Fourth Amendment) Regulations All investments should be made in graded securities and the grading shall not be less than of ‘very strong’ rating by a reputed and independent rating agency registered with SEBI. Corporate bonds or debentures rated not less than AA, A+ or its equivalent and PI or equivalent ratings for short term bonds, debentures, certificate of deposits and commercial paper by a SEBI registered credit rating agency alone will be considered as Approved Investments. Every insurer should invest assets in securities which are actively traded in any Stock Exchange in India and which are attributable to segregated funds, in respect of linked business. Exposure Limits Prudential and exposure limits are defined in terms of individual securities, groups and industrial sectors with an upper limit of 10 percent of issued securities or fund value generally applying, except for related groups in which case 5 percent normally applies. In addition overriding minimum credit ratings are applied to most securities. No international investments are permitted and there are tight limitations on and reporting requirements for the charging of assets. Till the last year insurance companies were allowed to buy only 10% of the shares outstanding in a company. Several large insurers have been unable to buy enough quality stocks in the market and have demanded an increase in the limit. In the year 2013, IRDA allowed insurers to invest as much as 12-15% in a single company. The move by the IRDA to raise investment limits enabled private insurers buy more shares from the market, which in turn helped support stocks  48   V. Pugazhenthi & C. Sunitha   overall. Similarly the State-owned Life Insurance Corporation of India, whose investment limits are governed by the LIC Act, was allowed LIC to invest up to 25% in a single company. Originally investment regulations specified restricted limits on deposits with individual banks for both life and nonlife insurers. However, this was changed and bank linkages are now largely the responsibility of the directors, subject to an overriding aggregate limit. The Board Risk Management Committee is responsible for monitoring such exposures. An overall exposure limit to financial and banking institutions of 25 percent of investment assets remains in place. Policyholders’ funds cannot be invested outside India. The use of derivatives is permitted to a very limited extent for the purpose of hedging only i.e., the underlying securities must be held by the purchaser. Insurers are required to hold unencumbered assets. Short selling of assets is not permitted. Before transacting in derivatives and related markets, insurers have to submit a policy for approval by their Boards, including how risk will be measured. In turn, and before dealing in fixed income derivatives, an insurer’s Board is required to produce a risk management policy, ensure adequate internal controls are in place and set prudential limits. The July 30, 2008 regulations also specified the investment governance structure and a list of 11 quarterly investment returns. ACTUAL INVESTMENTS OF THE INSURANCE SECTOR  As on 31 st  March 2013, the accumulated amount of investments held by the insurance industry was to the tune of Rs. 1867886 crore. In the year 2012-13 itself the Assets Under Management (AUM) of the Indian insurance industry grew by Rs. 187359 crore i.e., 11.15%. The share of life insurers to the AUM was to the tune of Rs. 1744894 crore i.e., 93.42%. Similarly the public sector insurers continue to contribute major share of Rs. 1486635 Crore i.e., 80% of the total investments. Table 4: Total Investments of the Insurance Sector as on 31 st  March (Rs. in Crore) Insurer Life Non-Life Total 2012 2013 2012 2013 2012 2013 Public Sector 1269070 1402991 71104 83644 1340174 1486635 Private Sector 312188 341902 28165 39348 340353 381250 Total 1581259 1744894 99268 122992 1680527 1867886 Growth % over the Previous Year Public Sector 10.49 10.56 16.12 17.64 10.77 10.93 Private Sector 10.89 9.52 32.32 39.71 12.4 12.02 Total 10.57 10.35 20.3 23.9 11.1 11.15 Source:  Annual Report 2012-13, IRDA.  Investment of Life Insurers There are 24 life insurers in India with combined assets of at least Rs. 17 trillion, with nearly Rs. 5 trillion held in equity. The total value of the funds invested by life insurance companies as on 31 st  March 2013 was Rs. 1744894 crore. Of this Rs. 342507 crore, i.e., 20% was from Unit Linked Insurance Policies. The remaining Rs. 1402387 crore (i.e., 80%) of the total funds has come from the other traditional life insurance products. The share of ULIP in the amounts invested in 2012-13 witnessed a slide by Rs. 27465 crore (i.e., by 3.77%) comparing the previous year. For the last few years it is showing a downward trend as the stock markets are highly volatile which makes ULIPs less attractive in the industry.  An Analysis of Investments of Indian Insurers in the Financial Year 2012-13   49 Investment of Life Insurers-Instrument-Wise The investment pattern of the life insurance companies in the year 2013-14 is similar to that of the previous year. As for as the funds of traditional life products are concerned, the Central Government Securities ( 36.52%), approved securities (32.53%) and state Government and other approved securities (18.97%) remain as the major destinations. Nearly 95% ULIP funds were also parked only in Approved Investments. Table 5: Table Showing the Instrument-Wise Investments of Life Insurers (As on 31 st  March) (Rs. in Crore) Investments from 2012 2013 Amount Percentage Amount Percentage Traditional Products 1 Central Govt. Securities 468082 38.64 512180 36.52 2 State Govt. and other approved securities 214515 17.71 265989 18.97 3 Housing & Infrastructure 97320 8.03 118878 8.48 4 Approved Investments 385107 31.79 456256 32.53 5 Other Investments 46262 3.82 49084 3.5 A. Total (1+2+3+4+5) 1211287 100 1402387 100 ULIP Funds 6 Approved Investments 346340 93.61 325283 94.97 7 Other Investments 26632 6.39 17224 5.03 B. Total (6+7) 369972 100 342507 100 Grand Total (A+B) 1581259 1744894 Source:  Annual Report 2012-13, IRDA. Investment of Life Insurers-Fund-Wise The fund-wise classification of investments reveals that the traditional life fund is biting a lion share of Rs. 1120000 crore (i.e., 64.19%) out of which LIC’s contribution was Rs. 1037656 crore (i.e., 92.65%). It was followed by the Pension and General Annuity Fund and Group Fund with a share of Rs. 282387 crore (i.e., 16.18%) and ULIP fund, with Rs. 342507 crore (i.e., 19.63%). The decline of ULIP funds was taken away by the other two funds, Pension, Annuity &Group fund going up from 14.97% to 16.18% and the Life Fund getting geared up from 61.64% to 64%. The LIC continue to dominate the life industry’s investment with Rs. 1402991 crore (i.e., 80.40% of the total investments of life insurers). Table 6: Instrument as well as Sector-Wise Investments of Life Insurers (As on 31 st  March) (Rs. Crore) Insurer Life Fund Pension and General Annuity & Group Fund Unit Linked Fund Total of all funds 2012 2013 2012 2013 2012 2013 2012 2013 LIC 914614 1037656 212754 251011 141703 114324 1269070 1402991 Private 60006 82343 23913 31375 228269 228184 312188 341902 Total 974620 1120000 236667 282387 369972 342507 1581259 1744894 % to total 61.64 64.19 14.97 16.18 23.4 19.63 100 100 Source:  *Annual Report 2012-13, IRDA Table 7: Fund-Wise Growth of Investments of Indian Insurers (As on 31 st  March) (Rs. Crore) Investments from 2012 2013 Amount Percentage Amount Percentage Life Fund 974620 15.88 1120000 14.92 Pension and General Annuity & Group Fund 236667 24.61 282387 19.32 Traditional (A) 1211287 17.49 1402387 15.78 Unit Linked Fund(B) 369972 -7.30 342507 -7.42 Grand Total (A+B) 1581259 10.57 1744894 10.35 Source:  Annual Report 2012-13, IRDA
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