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IRDAI Caps Expenses For General, Health Insurers

The regulations will come into force from April 1 and remain in effect for a period of three years.

<div class="paragraphs"><p>(Source: Unsplash)</p></div>
(Source: Unsplash)

India's insurance regulator has approved a single limit of management expenses for general insurers in a given year across segments.

In the final notification dated March 26, it approved the proposal for removal of segment-wise capping. As a result:

  • General insurers are to cap expenses at 30% of the gross written premiums.

  • Health insurers are to cap expenses at 35% of the gross written premiums.

In its draft notification in August, the Insurance Regulatory and Development Authority of India had proposed the removal of segment-wise capping of management expenses, putting them at a standard 30% for both general and health insurers. In its revised November draft, it had proposed capping general insurers at 30% and raised capping limits of health insurers to 35% of the gross written premiums.

Additional Expenses Allowed In Final Notification

  • The regulator has allowed a maximum of 15% of the expenditure incurred towards the rural sector, PM Suraksha Bima Yojana, PM Jan Arogya Yojana and PM Fasal Bima Yojana.

  • It allowed additional expenses to the extent of 5% of the allowable expenses of management towards insurtech and insurance awareness.

  • It has continued to allow up to 10% of expenses towards head office costs in case of a foreign branch of an Indian insurer.

The regulations will come into force from April 1 and remain in effect for a period of three years.

The insurer should have a well-documented policy approved by its board, specifying the allocation and apportionment of expenses of management among various business segments and basis of such allocation and apportionment, according to the notification.

The IRDAI also announced rules for commission, which will allow the insurers to be no longer bound by the regulator's mandated limits on allowable commissions to be paid for promoting products in different lines of business.

These allowable commission payments to intermediaries for distribution of insurance products also fall within the overall limits of management expenses prescribed in the notification and must be decided by the board of the insurer accordingly.

The notification on expenses of management for life insurers is still awaited.

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IRDAI Removes Individual Caps For Allowable Commission To Be Paid By Insurers

The IRDAI announced important regulatory changes like the revised expenses of management and commission limits for the industry, according to Tapan Singhel, chief executive officer at Bajaj Allianz General Insurance Co. "We firmly believe that the shift from product-level commissions to a company-wide limit of expenses will ensure parity across varying business models while rendering greater flexibility in managing expenses for insurers."

He said these limits would help in bringing cost discipline, with the majority of the insurers above the prescribed norms of expenses and with the industry reeling with a combined ratio—loss ratio plus expense ratio—of more than 118%.

This should translate into better pricing and products for customers in the medium to long-term, Singhel said. "The industry welcomes this change with open arms."

Prithvish Uppal, insurance analyst with Asian Markets Securities Pvt., had expected the move to boost competitiveness through cost efficiency. In an earlier conversation with BQ Prime, he said insurers that enjoy scale might stand to benefit more.

Smaller insurers need to undertake disproportionately higher expenditure to boost market visibility and expand their distribution channels at the onset as compared to the large established players, Uppal said. "This move could, therefore, prove disadvantageous to them."

The final notification does grant the regulator the power to exercise forbearance in case an insurer exceeds the limits of expenses of management in two cases:

  • It may be exercised on a case-to-case basis in respect of insurers having 'duration of business' up to five years.

  • For insurers having actual expenses of management more than the allowable limit in the 2023 financial year, the regulator, having regard to the business model of the insurer, may grant forbearance. This shall, however, be subject to the confirmation by board of the insurer that it shall bring its actual expenses within the allowable limits within a period of three years.