It is said that insurance companies should make their investments very prudentially. Why ?

Insurance companies should make their investments very prudentially because insurance business is globally regulated for reasons of equity and efficiency. Insurance companies receive huge amounts of cash in the form of premiums. These premiums are again invested by Fund Managers of the Insurance Company as per the guidelines of the Insurance Regulatory and Development Authority of India (IRDAI). The investments are regulated as they are made from the money contributed by the policyholders. The policyholders keep their trust with the insurance companies about the assurance provided by the companies about risk coverage and returns. And the regulator IRDAI is the watchdog for the funds invested by the policyholders. Moreover, insurance funds represent public trust money, and insurers are expected to maintain capital adequacy and solvency margins at all times. Since insurance liabilities are predictable but long-term in nature, investments must emphasize safety, liquidity, and stable returns rather than high risk. Prudential investment also ensures financial stability of the insurance company, prevents systemic risk, and supports confidence in the insurance sector. Hence it is necessary that the funds should be invested prudentially considering the risk and return.