CS Professional · Banking and Insurance - Laws and Practice · Functions in Insurance and Compliance related thereto (Part I)
A life insurer proposes a scheme in which policy benefits are not fixed but depend on how the premiums of policyholders who die within five years are distributed among surviving policies. Separately, it wants to allocate reversionary bonuses after its periodical actuarial valuation. Under section 52 of the Insurance Act, 1938, which statement is correct?
The scheme is prohibited, but bonus allocation is allowed. Section 52 bars business on the dividing principle, where benefits depend on distributions among policies becoming claims within time-limits. Its proviso permits bonuses to life policyholders from periodical actuarial valuation, as reversionary additions or immediate cash bonuses.
- ABoth the scheme and the bonus allocation are prohibited
- BThe scheme is prohibited as business on the dividing principle, but bonus allocation following periodical actuarial valuation is allowedCorrect
- CThe scheme is allowed, but bonus allocation is prohibited
- DBoth are allowed with Authority approval
Explanation
Section 52 prohibits starting business on the dividing principle, where benefits depend on distribution among policies becoming claims within time-limits. The proviso expressly permits allocating bonuses to life policyholders from a periodical actuarial valuation, as reversionary additions or immediate cash bonuses. So the scheme is barred and the bonus is not.
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