Banking and Insurance - Laws and Practice · Functions in Insurance and Compliance related thereto (Part III)

Actuarial, Investment and Valuation Functions of Insurers

Updated 11 October 2026 · Fact-checked

The actuarial function prices policies, sets reserves for future claims and values the insurer's liabilities against its assets. The investment function deploys policyholders' funds under Insurance Act limits and IRDAI regulations. Section 27E bars investing policyholders' funds outside India, and section 22 lets the Authority order a revaluation if the basis was faulty.

Understand Actuarial, Investment and Valuation Functions

An insurer collects premium today and pays claims years later. Two questions follow. How much should it charge? How much must it set aside? The actuary answers both using statistics, mortality or claim data, and assumptions about interest and expenses.

Pricing decides the premium before a policy is sold. It uses expected claims, expenses, a margin for risk and a profit or surplus loading. Reserving happens after the policy is sold. It estimates the liability the insurer already owes, such as future benefits on in-force policies and claims reported but not settled. Pricing looks forward at a product. Reserving looks at the existing book.

Valuation is the periodic exercise of comparing assets with liabilities. For life insurers, an actuary investigates the financial condition and values liabilities. The valuation abstract and statement go to the Authority under the Act and regulations. Section 13 deals with this investigation and valuation. The detailed form and manner of the abstract and statement are matters on which the Authority makes regulations under section 114A(2)(g).

Section 22 is a safeguard. If the Authority thinks a section 13 investigation or valuation does not show the true state of affairs because of a faulty basis, it may order a fresh one. It must first give the insurer notice and a chance to be heard. The new valuation is done at the insurer's expense by an actuary the insurer appoints and the Authority approves. The insurer must give that actuary all material required within the period the Authority specifies, which cannot be less than three months.

The investment function invests the funds collected so that they can meet claims. The Act and regulations control where and how. Section 27E says no insurer shall directly or indirectly invest outside India the funds of the policyholders. The Authority makes regulations on investment of assets under sections 27, 27A, 27B, 27C and 27D, as listed in section 114A(2)(i). Section 28 deals with the return of investments, whose form, time and manner are also set by regulations.

Key rules to remember

Overseas investment bar: Policyholders' funds: no investment outside India, directly or indirectly; Section 27E. Both direct and indirect routes are caught.
Revaluation power: Faulty basis + notice + opportunity of hearing → Authority orders valuation by an approved actuary at the insurer's expense; Section 22(1). The insurer appoints the actuary; the Authority approves.
Minimum period for material: Period specified by the Authority ≥ 3 months; Section 22(1). This is the time the insurer has to place all required material before the actuary.
Regulation-making power: Section 114A: regulations must be consistent with the Act and rules; laid before Parliament for 30 days; Investment of assets is covered by clause (i) of sub-section (2); valuation abstract and statement by clause (g).
Premium logic (concept): Premium = expected claims + expenses + margin for risk and profit; A conceptual statement of pricing, not a statutory formula. Use it to explain pricing.

How to solve Actuarial, Investment and Valuation Functions questions

Use this order for any case-based question on actuarial, investment or valuation functions.

1Identify the function tested: pricing, reserving, valuation or investment.
2Pick out the key facts: who acted (insurer, actuary, Authority), what was done and when.
3State the rule in plain words, with the section where you are sure of it (22, 27E, 114A).
4Check each condition: notice, hearing, approved actuary, expense borne by insurer, time for material.
5Apply the rule to the facts, one condition at a time.
6Conclude clearly: valid or invalid, permitted or prohibited.
7Add a practical compliance point, such as filing the abstract and statement or keeping investment records.

Quickest way: Four-label sort

When to use it: When you have little time and the question mixes several actuarial or investment points.

Label each fact: price, reserve, value or invest.
Write one line of rule per label.
Match the facts to the rule and mark any gap.
Finish with a one-line conclusion and one compliance step.

Common mistakes in Actuarial, Investment and Valuation Functions

Treating pricing and reserving as the same thing
Both use the same actuarial tools and data.
Fix: Pricing sets the premium before sale for a product. Reserving measures the liability on policies already sold.
Saying the Authority can order revaluation without notice
Students remember the power but forget the safeguards.
Fix: Section 22 requires notice to the insurer and an opportunity to be heard before it orders a revaluation.
Saying the Authority appoints the actuary under section 22
The Authority orders the exercise, so it looks like its appointee.
Fix: The actuary is appointed by the insurer, but must be approved by the Authority. The cost is the insurer's.
Limiting the overseas ban to direct investment
Students read only the first few words of the section.
Fix: Section 27E covers direct and indirect investment outside India of policyholders' funds.
Quoting investment limits or percentages from memory
Notes mix old and new regulations.
Fix: State that investment of assets is governed by the Act and the Authority's regulations. Give a figure only if you are sure of it.

Worked examples

Example 1

Surya Life Insurance Ltd. has valued its liabilities using an assumption the Authority considers unrealistic. The Authority wants a fresh valuation. Advise the company on the Authority's power and the company's obligations.

Show the solution

Provision: section 22 lets the Authority act where a section 13 investigation or valuation does not properly show the insurer's affairs because of a faulty basis.
Condition: the Authority must give notice to the insurer and an opportunity to be heard.
Process: the investigation and valuation is done as at a date the Authority specifies, by an actuary appointed by the insurer and approved by the Authority.
Cost: it is at the insurer's expense.
Insurer's duty: place all material required by the actuary at the actuary's disposal within the period the Authority specifies, not less than three months.
Further duty: furnish the abstract and statement by the date the Authority specifies.

Answer: The Authority may order a revaluation after notice and hearing. Surya must appoint an actuary for the Authority's approval, bear the cost, supply the material within the specified period (not less than three months) and furnish the abstract and statement by the specified date.

Example 2

Bharat Assurance Ltd. plans to place part of its policyholders' funds in a fund based in Singapore through a subsidiary, to earn higher returns. Is this permitted?

Show the solution

Provision: section 27E says no insurer shall directly or indirectly invest outside India the funds of the policyholders.
Facts: the investment is made through a subsidiary, so it is indirect, and the fund is outside India.
Analysis: using a subsidiary does not take the investment outside the word 'indirectly'.
Higher return is not an exception under the section.
Compliance point: the investment committee should check every proposal against the Act and the Authority's investment regulations before approval.

Answer: Not permitted. The proposal is an indirect investment outside India of policyholders' funds, which section 27E prohibits.

Exam tips

Write the section number with every rule you quote, but only the ones you are sure of: 13, 22, 27E, 114A.
In revaluation questions, list all safeguards: notice, hearing, approved actuary, insurer's cost, three-month minimum.
Use the pricing versus reserving contrast in one clear line; examiners like it.
Close every case answer with a compliance point, since papers are case-based and practical.
For investment questions, name the regulation-making power in section 114A rather than inventing limits.

Practice questions from Functions in Insurance and Compliance related thereto (Part III)

Actuarial, Investment and Valuation Functions in other exams

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

FRM Part IIObjectives and Role of the Investment Function

Actuarial, Investment and Valuation Functions: frequently asked questions

What does the appointed actuary do in an insurance company?

The actuary advises on pricing, reserving and valuation, and checks that liabilities are measured on sound assumptions. The actuary's work feeds the valuation abstract and statement furnished to the Authority.

What is the difference between pricing and reserving?

Pricing sets the premium for a product before it is sold. Reserving estimates the liability on policies already sold, including claims yet to be paid.

Can an insurer invest policyholders' funds abroad?

No. Section 27E prohibits an insurer from investing the funds of policyholders outside India, directly or indirectly.

Who makes the detailed investment rules for insurers?

The Authority makes regulations on investment of assets under section 114A(2)(i). They must be consistent with the Act and are laid before Parliament for thirty days.