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CMA Final · Risk Management in Banking and Insurance · Life Insurance

Under Section 56 of the Insurance Act, 1938, in the winding up of an insurer, how are life insurance assets treated?

Life insurance assets and liabilities are ascertained separately, and those assets may meet other liabilities only to the extent they exceed the liabilities of life insurance business. Section 56(1) thus ring-fences the life fund for policyholders in a winding up or insolvency.

  1. APooled with all other assets and applied pro rata to every liability
  2. BValued separately and applied to non-life liabilities only if they exceed life insurance liabilitiesCorrect
  3. CApplied first to shareholders' dues before policyholder liabilities
  4. DDistributed only to policyholders who were allocated profits

Explanation

Section 56(1) requires assets and liabilities of life insurance business to be ascertained separately. Life assets cannot discharge other liabilities except to the extent they exceed life insurance liabilities. Pooling would defeat this ring-fencing.

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