Investment Management in Insurance and Reinsurance Sector
Pratistha Rijal
Deputy Manager, Nepal Reinsurance Company Limited
Insurance contract refers to the agreement between the insurer and the insured binding par cause within such a specified time period (known also as insurable period) in de terms in which the insurer agrees to indemnify the insured for a loss caused by a duration for a financial payment known as insurance premium. Life insurance covers the risk an individual covering the insured in the instance of an insured’s untimely demise or provides an appropriate amount in later life when earning capabilities are diminished whereas non-life insurance provides coverage for damages by protecting insured resources (insurable interest) providing money in the event of an accidental loss. Similarly, reinsurance companies undertake and transfer the risks of life and non-life insurance companies in exchange of reinsurance premium acting as “Insurer of Insurers.
Insurance in its pure insurance function underwrites the risks and shocks and distributes we all risks insured in the same class dividing the cost of a threat among a significant number of participants who are directly or indirectly exposed to the same danger in order to compensate some insured, who are actually victimized or genuinely harmed by it. An engineering insurance product, for instance, will issue a policy in exchange for payment the premium, in which the insurance companies agree to compensate the insured for an or damage of engineering loss from contractors all risks, but only up to the amount mentioned in the policy and only if the loss happens within the period for which the policy effective. In this approach, life insurance really provides a form of security as well as investment, as a predetermined sum is either repaid to the insured at the moment of death or at the end of insurable period. This arrangement is considered to be of maximum good faith and insurable interest. The reinsurance companies on other hand are responsible for compensating the damage when life/non-life companies bear the risk or honor claim to the insured.
Insurance and reinsurance companies, in this context, is a system for minimizing financial by transferring risk of loss from one institution to another. In other words, insurance is the best means for security to human life and resources from various risks. Insurance companies are among the most important financial institutions and intermediaries. Only when a competitive insurance service is delivered insurance companies play a prominent part in the framework of every economy since wide certainty to manufacturing and production, business, and capital through tment of premium resources. Insurance company charges a certain amount.
Called premium in return of assuring the insured indemnity if the states risk caused economic losses within the policy period. Insurance company collects fund in the form of called premium in return of assuring the insured for indemnity if the stated risk caused premium and invests in different sectors for maximized return. Once earned, the premium is regarded as the income of the insurance industry which is on cash basis ie, policy issued on advance but only when premium is received.
The growth and development of an insurance industry is based on the large number of groups of various individuals, corporate businesses and financial organization who are policy holders of the company obtained directly by the representatives or through agents. The habit of saving, tendency of risk mitigation and mentality for securitization of individual habit plays vital role for insurance sector contribution through policyholders The large number of policyholders leads to the large amount of premium collection for the minimization of occurrence of various risk and uncertainties. Insurance companies are considered as an important part of an institutional investment of any country as they invest in fixed deposits, corporate securities as well as other collective investment schemes and in return, they produce sufficient income to meet their obligations. Insurance companies perform three distinct jobs namely:
i. Diversification of loss compensation
ii. Risk management and
iii. Resource mobilization
Currently, 14 life and 14 non-life companies as well as 2 reinsurance companies are operating post-merger (in case of life and non-life insurance companies). The capital requirement for life insurance companies is 5 billion Nepalese rupees and non-life insurance companies is 2.5 billion Nepalese rupees which has been mandatorily increased for maintaining capital adequacy in insurance sector so as to have stabilized healthy and standard competition in insurance sector.
The insurance industry is a significant and important element of the macro economy, and it has emerged as a powerful institutional player in the financial market, influencing the economy’s health through its multidimensional role in saving and capital markets. As per the latest published data of the Nepal Insurance Authority for F/Y 2022/23, the gross premium of overall insurance market is 182.91 billion Nepalese rupees, individually 142.57 billion Nepalese rupees contributing from life insurance companies and 40.34 billion Nepalese rupees from non-life insurance companies which is 3.40% of the Gross Domestic Product (GDP). The contribution to the market economy from life insurance sector is 2.65 %, whereas non-life insurance sector is 0.75 %. It acts as a mobilizer of savings, a financial intermediary, a promoter of investment activities, a stabilizer of financial markets and a risk manager. Insurance companies generally function on core insurance element mainly concentrated on collecting premiums or funds and honoring claim and managing the available funds through various diversified investments sectors to earn additional revenues in the form of interest, dividends and realized capital gains.
The growth and development of an insurance industry is based on the large number of groups of various individuals, corporate businesses and financial organization who are policy holders of the company obtained directly by the representatives or through agents. The habit of saving, tendency of risk mitigation and mentality for securitization of individual habit plays vital role for insurance sector contribution through policyholders The large number of policyholders leads to the large amount of premium collection for the minimization of occurrence of various risk and uncertainties. Insurance companies are considered as an important part of an institutional investment of any country as they invest in fixed deposits, corporate securities as well as other collective investment schemes and in return, they produce sufficient income to meet their obligations. Insurance companies perform three distinct jobs namely:
Currently, 14 life and 14 non-life companies as well as 2 reinsurance companies are operating post-merger (in case of life and non-life insurance companies). The capital requirement for life insurance companies is 5 billion Nepalese rupees and non-life insurance companies is 2.5 billion Nepalese rupees which has been mandatorily increased for maintaining capital adequacy in insurance sector so as to have stabilized healthy and standard competition in insurance sector.
The insurance industry is a significant and important element of the macro economy, and it has emerged as a powerful institutional player in the financial market, influencing the economy’s health through its multidimensional role in saving and capital markets. As per the latest published data of the Nepal Insurance Authority for F/Y 2022/23, the gross premium of overall insurance market is 182.91 billion Nepalese rupees, individually 142.57 billion Nepalese rupees contributing from life insurance companies and 40.34 billion Nepalese rupees from non-life insurance companies which is 3.40% of the Gross Domestic Product (GDP). The contribution to the market economy from life insurance sector is 2.65 %, whereas non-life insurance sector is 0.75 %. It acts as a mobilizer of savings, a financial intermediary, a promoter of investment activities, a stabilizer of financial markets and a risk manager. Insurance companies generally function on core insurance element mainly concentrated on collecting premiums or funds and honoring claim and managing the available funds through various diversified investments sectors to earn additional revenues in the form of interest, dividends and realized capital gains
Insurance manages the risk of uncertainty in an efficient manner and plays a significant role in mobilizing domestic savings, turning capital into productive investments, by crucial role in promoting the trade and commerce activities which contributes to the managing loss and maintain financial stability. The non-life insurance, hence plays a sustainable growth of an economy. The principle of indemnity in insurance mainly focuses on compensating the insured for the loss that occurs.
To oversee the investment of funds within the Nepalese insurance sector, the Nepal Insurance Authority, the regulatory body for insurance in Nepal, has introduced specific guidelines. These guidelines were issued on the 20th of Mangshir, 2079, with the aim of setting limits on investment amounts and promoting a healthy competitive environment in the market. The liquidity and market interest rates fluctuate in response to the supply and demand of funds within the market. The new guidelines represent a significant shift as they have transitioned from a fixed percentage of total investment to the previous method based on the technical reserves of individual companies. This shift has resulted in significant changes in investment practices compared to the previous directive, which was issued on B.S. 2075.11.19.
Under the new guidelines, the maximum limit for ‘B’ class fixed deposits is set at ten percent of the total investment, a change from the previous maximum of twenty percent based on technical reserves. Similarly, for ‘C’ class fixed deposits, the maximum limit is set at five percent of the total investment, down from the previous maximum of ten percent based on technical reserves. These changes have bolstered the security of investment positions to some extent and have promoted healthy banking practices within the market. As a result, insurance and reinsurance companies have diligently followed the directives set by the Regulatory Authority.An insurance or reinsurance company can maximize its wealth and fund collection by focusing on the maximization of returns on its investments. Therefore, they must invest their funds where they can achieve maximum profits. The insurer must earn at least the assumed rate of interest; otherwise, they will face losses.
Investments should be made in securities that yield the highest returns while adhering to the principle of safety. By earning higher interest, insurers can reduce their future premiums and, as a result, expand their business. It is well understood that both safety and profitability are crucial factors in insurer investments. This saying is of paramount importance to insurers, and they should
investments in a single sector.
To minimize risks, insurers must diversify their investments across different sectors. According to the latest published data from the Nepal Insurance Authority for the fiscal year 2022/23, the gross investment in the life insurance sector amounted to 628,96 billion Nepalese rupees. Of this total, 569.16 billion Nepalese rupees came from life insurance companies, and 59,79 billion Nepalese rupees originated from the non-life insurance sector. Diversification of such a substantial investment helps to mitigate losses, following the law of averages.
This strategy provides maximum security while maintaining high
yields and improved liquidity, provided that diversification takes into account all market risks and factors.
In conclusion, it becomes evident that linking investment earnings to firm-specific factors, make more informed decisions regarding insurance and investments. Ideally, a portfolio manager should increase the systematic risk of the portfolio in anticipation of an upturn in the market and decrease the beta before a downturn. Investment is essential for making any business profitable, regardless of its nature. It also stands to reason that current profitability is related to future investment, and current investment is related to future profitability. The ultimate outcome of a well-functioning insurance market should involve improved risk pricing, enhanced efficiency in the allocation of capital and economic activities, and increased productivity.
Additionally, specific ratios used to analyze insurers include the combined and operating ratios, along with their components, underwriting leverage, investment yield, and investment return. Insurers and reinsurers should establish investment portfolios using a robust optimization framework and diversify their investments into higher income-generating strategies, taking into account firm- specific constraints to enhance overall efficiency and generate returns. Globally, most institutional investors, such as insurance companies, invest the funds they receive across various sectors to generate returns.