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Risk Management in Banking and Insurance · Managing Risk in Insurance Business

Claims and Investment Risk Management in Insurance

Updated 11 October 2026 · Fact-checked

Claims and investment risk management means controlling what an insurer pays out and how it invests what it holds. You control claims through sound settlement, reserving and fraud checks. You control investment risk through asset-liability matching and by keeping assets above liabilities, as the solvency rules require.

Understand Claims and Investment Risk Management

An insurer collects premium first and pays claims later. So it holds a large pool of money. Two risks follow. The first is claims risk: claims turn out higher, or later, or more costly than expected. The second is investment risk: the assets backing the promises lose value or cannot be sold in time.

Claims management covers intimation, registration, investigation, assessment and settlement. Good control means prompt, fair settlement and checks that stop wrong payments. Reserving is setting aside money for claims already reported but not settled, and for claims incurred but not yet reported. Under-reserving makes profit look better than it is and weakens solvency. Over-reserving hides real results and locks up capital.

Fraud control targets false claims, inflated claims, staged losses and collusion by insiders or intermediaries. Measures include strong underwriting and KYC, red-flag triggers in claim data, investigation units, surveyor checks, claim-history databases, audit trails, and clear penalties for staff and intermediaries who collude.

Asset-liability management (ALM) matches assets to liabilities in term, cash flow and interest sensitivity. A life insurer with 20-year guarantees should not fund them only with short-term assets, or it faces reinvestment risk when rates fall. Investment risk also includes credit risk of issuers, market risk, concentration risk and liquidity risk. IRDAI regulates investment of insurers' funds and the maintenance of margin of solvency (Section 14(2)(k) and (l) of the IRDA Act, 1999).

Solvency is the cushion of assets over liabilities. Under Section 64VA of the Insurance Act, 1938, an insurer must at all times keep excess of assets over liabilities of not less than fifty per cent of the minimum capital stated in section 6, arrived at as the regulations specify. Failure means the insurer is deemed insolvent and may be wound up by the court on IRDAI's application.

Key rules to remember

Statutory floor on sufficiency of assets (Section 64VA(1))
Assets − Liabilities ≥ 50% of minimum capital under section 6 (computed as per regulations)
Must hold at all times. The amount is arrived at in the manner the regulations specify.
Consequence of breach of the floor (Section 64VA(2))
Non-compliance ⇒ deemed insolvent; may be wound up by court on IRDAI's application
The application is by the Authority, not by the insurer.
Control level of solvency (Section 64VA(3)-(4))
Breach ⇒ financial plan to IRDAI; correction period not exceeding 6 months
The control level is specified by IRDAI regulation. The plan must follow IRDAI directions.
IRDAI response to an inadequate plan (Section 64VA(5))
Modify plan; directions on new business and/or appointment of an administrator
The Authority may direct on transacting new business, appoint an administrator, or both.
Failure to comply with a requisition (Section 64VA(7))
No compliance within 2 months of requisition ⇒ deemed default
Applies to inspection or verification of assets and liabilities.
Penalty for failing to maintain solvency margin (Section 102(c))
Penalty = ₹1,00,000 per day of continuing failure, or ₹1,00,00,000, whichever is less
The same penalty applies to failing to furnish returns or comply with directions.
Reserve for claims
Claims reserve = Reported unpaid claims (case reserves) + Incurred but not reported (IBNR)
A working definition for answers. Methods and amounts follow actuarial and regulatory norms.

How to solve Claims and Investment Risk Management questions

Use this method for any case or descriptive question on claims, reserving, fraud, ALM or solvency.

  1. 1Identify the risk first: claims risk, reserving risk, fraud, investment risk, ALM mismatch or solvency. Name it in your first line.
  2. 2Find the cause in the facts: late reporting, weak underwriting, rate fall, long-term liabilities funded by short assets, concentration in one issuer.
  3. 3State the rule or principle. For solvency, quote Section 64VA with exact conditions, such as fifty per cent of minimum capital and the six-month plan.
  4. 4Apply it to the numbers or facts given. For numerical parts, compute assets minus liabilities and compare with the required amount.
  5. 5Name the regulator's power or consequence: financial plan, directions on new business, administrator, penalty under Section 102.
  6. 6Recommend controls: reserving review, fraud triggers, matching of assets and liabilities, investment limits, stress tests.
  7. 7Close with a clear recommendation or conclusion tied to the facts.

Quickest way: Risk, rule, remedy in three lines

When to use it: Use for 14-mark case answers or MCQs when time is short.

  1. Line 1: name the risk and its cause from the case.
  2. Line 2: give the rule, such as Section 64VA, with exact conditions.
  3. Line 3: give the remedy, such as a financial plan within six months, tighter reserving, ALM matching or fraud controls.
  4. For MCQs, test each option against exact words: 'fifty per cent', 'six months', 'two months', 'deemed insolvent'.

Common mistakes in Claims and Investment Risk Management

  • Saying the solvency floor is fifty per cent of assets or of liabilities.

    Students remember 'fifty per cent' but not what it applies to.

    Fix: It is fifty per cent of the minimum capital under section 6, and the excess of assets over liabilities must be at least that.

  • Treating the control level of solvency as fixed in the Act.

    The numeric ratio is often learnt as part of the section.

    Fix: Section 64VA(3) says IRDAI specifies the control level by regulation. The Act sets the floor and the consequences.

  • Saying the insurer is wound up automatically on breach.

    'Deemed insolvent' is read as 'wound up'.

    Fix: The insurer is deemed insolvent and may be wound up by the court on IRDAI's application.

  • Confusing the six-month plan period with the two-month requisition period.

    Both are short periods in the same section.

    Fix: Six months at most to correct a control-level deficiency under the plan. Two months to comply with an IRDAI requisition for inspection or verification.

  • Treating ALM as only an investment-return exercise.

    Students focus on yield, not on liabilities.

    Fix: Explain matching of term, cash flow and rate sensitivity of assets with liabilities, and mention liquidity to meet claims.

  • Writing fraud control as a list of generic words.

    No link is made to claims stage or fraud type.

    Fix: Link each control to a stage: underwriting and KYC, claim intimation red flags, investigation, settlement audit, intermediary discipline.

Worked examples

Example 1

A general insurer has minimum capital under section 6 of ₹200 crore. Its assets are ₹1,450 crore and liabilities are ₹1,370 crore. Does it meet the Section 64VA(1) requirement, and what follows if it does not?

Show the solution
  1. Required excess = 50% × ₹200 crore = ₹100 crore.
  2. Actual excess = ₹1,450 crore − ₹1,370 crore = ₹80 crore.
  3. ₹80 crore is less than ₹100 crore, so there is a shortfall of ₹20 crore.
  4. Under Section 64VA(2), an insurer that does not comply is deemed insolvent and may be wound up by the court on IRDAI's application.
  5. Failing to maintain the solvency margin also attracts a penalty under Section 102(c) of ₹1,00,000 per day of continuing failure, or ₹1,00,00,000, whichever is less.
  6. Note: the amount is computed as the regulations specify. This working assumes the figures given are on that basis.

Answer: It does not comply. Excess is ₹80 crore against a required ₹100 crore, a shortfall of ₹20 crore. It is deemed insolvent, may be wound up on IRDAI's application, and faces a penalty under Section 102.

Example 2

A life insurer sells 25-year guaranteed-return policies and invests most premium in 2-year bonds. Rates fall sharply. Explain the risk and the steps management should take, and say what IRDAI can do if solvency falls below the control level.

Show the solution
  1. Identify the risk: an ALM mismatch. Liabilities are long term with guaranteed returns, assets are short term.
  2. When the 2-year bonds mature, the insurer must reinvest at lower rates. This is reinvestment risk. Guaranteed payouts may then exceed asset returns, which erodes the surplus and solvency.
  3. Management steps: lengthen the asset term toward the liability term, use long-dated government and high-grade securities, set investment limits for issuer and sector concentration, and run interest-rate stress tests.
  4. Keep enough liquid assets to meet claims and surrenders, and review product pricing for new guarantees.
  5. If solvency falls below the control level, Section 64VA(4) requires the insurer to submit a financial plan to IRDAI, as directed, to correct the deficiency within a period not exceeding six months.
  6. If IRDAI finds the plan inadequate, under Section 64VA(5) it proposes modifications and may give directions, including on transacting new business or appointing an administrator, or both.

Answer: The risk is an ALM mismatch causing reinvestment risk. Match asset duration to liabilities, limit concentration, keep liquidity and stress test. On a control-level breach, file a financial plan within six months at most. IRDAI may modify it and direct on new business or appoint an administrator.

Exam tips

  • Quote Section 64VA with exact words: fifty per cent of minimum capital, deemed insolvent, plan within six months, two months for requisitions.
  • In numerical questions, compute required excess first, then actual excess, then state the shortfall or surplus and the legal consequence.
  • In case answers, tie each control to the stage of the claim or the type of investment risk in the facts. Generic lists lose marks.
  • For MCQs, watch options that swap six months and two months, or say 'wound up automatically'.
  • Do not quote a numeric control-level ratio unless the question gives it, since IRDAI sets it by regulation.

Practice questions from Managing Risk in Insurance Business

Claims and Investment Risk Management in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Claims and Investment Risk Management: frequently asked questions

What is the solvency margin of an insurer?

It is the excess of an insurer's assets over its liabilities. Section 64VA of the Insurance Act, 1938 requires this excess to be at least fifty per cent of the minimum capital under section 6, computed as the regulations specify. It must be held at all times.

What happens if an insurer breaches the control level of solvency?

It must submit a financial plan to IRDAI, as directed, to fix the deficiency within a period not exceeding six months. If IRDAI finds the plan inadequate, it can propose changes and give directions, including on new business or appointing an administrator.

What is asset-liability management in insurance?

It is the matching of assets with liabilities in term, cash flow and interest sensitivity. The aim is that investments can meet claims and guarantees when due, even when interest rates or markets move against the insurer.

How do insurers control claims fraud?

They use strong underwriting and KYC, red-flag triggers on claims, investigation units, surveyor and audit checks, shared claim data and action against colluding staff or intermediaries. Controls should cover each stage from proposal to settlement.

What is IBNR in claims reserving?

IBNR means claims incurred but not reported. The insurer sets aside a reserve for them in addition to reserves for reported unpaid claims, because the loss event has happened even if no one has yet notified it.