CMA Final · Risk Management in Banking and Insurance · Life Insurance
Under the Insurance Act, 1938, in the winding up of an insurance company that also carries on other classes of business, how are the assets held in respect of life insurance business treated?
The life insurance fund is ring-fenced in a winding up. Its assets and liabilities are ascertained separately, and the assets cannot meet other liabilities unless they exceed the liabilities of the life insurance business. Only that excess is available to other creditors.
- AThey are pooled with all other assets and shared pro rata among all creditors of the insurer
- BThey may be applied to liabilities other than life insurance liabilities only to the extent that they exceed the liabilities of the life insurance businessCorrect
- CThey are first applied to the liabilities of general insurance business, and any balance goes to life policyholders
- DThey are transferred to the Life Insurance Council to be distributed among member insurers
Explanation
Section 56(1) requires the assets and liabilities of life insurance business to be valued separately from other assets and liabilities. Life assets cannot be used to discharge non-life liabilities except to the extent they exceed the life liabilities. Pooling them with other assets, as in the first option, ignores this ring-fencing.
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