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CS Professional · Banking and Insurance - Laws and Practice · Functions in Insurance and Compliance related thereto (Part I)

Sunrise Life Insurance Ltd, an Indian life insurer, wants to declare a dividend to its shareholders. Its actuarial valuation, submitted to the Authority as part of the abstract, shows a deficit, although the life insurance fund holds a large balance. Under Section 49 of the Insurance Act, 1938, what is the position?

The insurer cannot pay the dividend from the life insurance fund. Section 49 permits dividends or bonuses only out of a surplus shown in the valuation balance-sheet submitted to the Authority after actuarial valuation. A deficit means no surplus exists, however large the fund balance is.

  1. AIt may pay the dividend from any portion of the life insurance fund, because the fund is large
  2. BIt may pay the dividend only if the Authority is informed within 30 days of payment
  3. CIt may not use the life insurance fund for the dividend, because only a surplus shown in the valuation balance-sheet can be usedCorrect
  4. DIt may pay the dividend, but only to the extent of 50% of the fund

Explanation

Section 49(1) bars an insurer from using any portion of the life insurance fund for dividends to shareholders or bonuses to policyholders, except a surplus shown in the valuation balance-sheet as a result of actuarial valuation. A deficit means there is no surplus, so the dividend cannot be paid from the fund. The size of the fund does not matter.

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