After collecting the premiums, the insurers make use of the premiums to make payments towards commissions, administrative expenses and claims but there is a difference in time between receipt of the premiums and payments to be made. During this time lag the insurers are in possession of large sums which they invest carefully keeping in view the security of the investment as well as the income on their investments. The investment department's personnel have to use their expertise to achieve a balance between secure investment and high returns.
The investment manager also has to ensure that the company is financially strong so that the company is able to settle all claims. The investments are spread out in government securities, shares and debentures of companies, fixed deposits with banks and finance companies, investment in land and buildings, etc.
There are times when the insurers may not make much profit from the underwriting (i.e. the surplus of premiums over commissions, administrative expenses and claims). Sometimes they may even suffer underwriting loss.
But they may earn enough income from investment which may outweigh the loss suffered in underwriting. Therefore, investment by an insurance company is of considerable importance.