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CS Professional · IFSCA - Regulations, Listing and Compliances · Insurance and Reinsurance

Kaveri Re IFSC Ltd, a reinsurer in GIFT IFSC, has assets of ₹500 crore and wishes to invest the whole amount in unlisted shares of a single group company to earn higher returns. How does the prudential framework view this proposal?

The proposal is inappropriate because insurers and reinsurers must invest under prescribed norms emphasising safety, liquidity and diversification of assets backing liabilities. Placing all assets in unlisted shares of one group company is a concentrated, illiquid exposure, and the issuer's consent or nationality does not cure it.

  1. APermitted, since reinsurers have complete freedom of investment
  2. BPermitted if the group company agrees in writing
  3. CNot appropriate, since investments must follow the prescribed investment norms that require safety, liquidity and diversification of assets backing liabilitiesCorrect
  4. DPermitted only if the shares are of an Indian company

Explanation

Prudential norms require assets backing insurance liabilities to be invested prudently with safety, liquidity and diversification. Concentrating everything in unlisted shares of one group company violates these principles. Neither a group company's consent nor the issuer's nationality changes that.

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