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III IC-46 study materials
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III IC-46: Regulation of Investment

III IC-46 · Work through your exam, one topic at a time.

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Regulation of Investment

Regulation of Investment

This domain tests the rules and governance around investing insurance funds, especially policyholders' funds. It covers the legal framework, permitted asset classes, exposure limits, valuation, ALM and compliance.

Core rules

  • Insurer investments are governed by the Insurance Act, 1938, the IRDA Act, 1999 and IRDAI investment regulations, principally the IRDAI (Investment) Regulations, 2016, read with circulars and the insurer's Board-approved investment policy.
  • Policyholders' funds must be invested under the prescribed pattern: minimum holdings in government and approved securities, ceilings on corporate bonds, equity, real estate, infrastructure and mutual funds, and limits by issuer, group, sector and related party.
  • The prudent-person principle applies alongside quantitative limits: safety, liquidity, diversification, matching of assets and liabilities, and no speculative or unapproved transactions.
  • Governance requires a Board investment policy, an investment committee, delegated authority, independent risk and compliance functions, periodic returns, internal/concurrent audit and statutory audit.
  • Investments must be valued and classified under applicable IRDAI norms; impairment and non-performing investments must be recognised. Derivatives, if permitted, are for hedging rather than speculation.

Worked example

Assume a policyholders' portfolio of 10,000 and an illustrative single-issuer cap of 10%. A holding of 1,200 in one issuer is 12%, so it breaches by 200. The insurer must not simply wait for market movement: it should record the breach, report it under the escalation process, and reduce or reclassify the exposure within the permitted remediation period. The same logic applies to group, sector and related-party limits.

Traps

Treating the investment pattern as a target rather than a boundary; ignoring group/related-party aggregation; using shareholders' funds limits for policyholders' funds; forgetting ALM and liquidity; and assuming a profitable portfolio is automatically compliant.