Life Insurance Finance
What the paper tests
IC-26 Life Insurance Finance examines how a life insurer collects, reserves, invests and returns money. Questions move between the annual actuarial valuation, the revenue account, the balance sheet, solvency margin, investment regulation and the surplus-distribution rules that bind them. Marks go to candidates who can read a set of figures and identify which fund is affected.
Two funds, one balance sheet
Life insurers keep policyholders' funds and shareholders' funds apart. Premiums, income on policyholder assets and claims belong to the policyholders' fund; share capital and the shareholders' share of surplus sit outside it. The revenue account reports the year's income and outgo; the balance sheet reports the funds after the actuarial valuation fixes reserves. A valuation surplus is not profit until, for participating business, the 90:10 distribution is applied.
Solvency and reserving
The available solvency margin (ASM) is net assets above actuarial liabilities. The required solvency margin (RSM) is set by IRDAI solvency regulations from reserves, sum at risk and a solvency factor. ASM/RSM must stay at or above 150%; a breach triggers regulatory action and a corrective plan.
Investments and ALM
Investment regulations prescribe minimum holdings in government securities and high-rated debt, single-issuer caps and limits on "other" investments. Assets must match liability duration and currency; ULIP funds are segregated and carry investment risk for the policyholder.
Worked example
Policyholder assets ₹5,000 crore, actuarial liabilities ₹4,500 crore, RSM ₹130 crore. ASM = 5,000 − 4,500 = ₹500 crore. Solvency ratio = 500 ÷ 130 = 385%. If ₹150 crore of assets are doubtful, ASM = ₹350 crore and the ratio falls to 269%. Both clear 150%, but asset quality drives the number.
Traps
Declared bonuses become a liability, not a free choice. The shareholders' share is at most 10% of valuation surplus, not 10% of premium. ULIP assets are not shareholders' money. Gross premium is not the same as net premium in valuation. Reinsurance recoveries and deposits must be recognised.