IRDAI Proposes To Cap General, Health Insurers' Expenses At 30% Of Revenue

India's insurance regulator has proposed a single limit of management expenses at 30% of the gross written premiums for general and health insurers in a given year across segments.

The Insurance Regulatory and Development Authority of India proposed the removal of segment-wise capping of management expenses, according to a draft notification issued on Aug. 1.

The segment-wise caps were introduced in an April 2016 notification. That allowed insurers to book expenses based on gross premium turnover for different segments such as fire, marine, motor, health retail, corporate, government, and miscellaneous group and retail.

For example, for the first Rs 200 crore turnover, a management expense of up to 35% was allowed; for the next Rs 150 crore, it was 30%; and so on.

The regulator has been liberalising several aspects of the regulation with an eye for risk management, Joydeep Roy, insurance partner at PWC told BQ Prime. He expects the latest decision to spur growth and increase penetration.

"Doing away with segment-wise capping has simplified the models of operations and planning," he said.

According to Avinash Singh, insurance analyst at Emkay Global, the proposed regulations may not be too radical but are more of a simplification.

"The expense caps provided under existing regulations are in an almost similar range based on business lines and with slabs," he said. "Hence, for multi-line general insurers, the ballpark figure might be close to the existing range."

For standalone health insurers, expenses allowed have gone down. But for insurers that have scale, it may not be an issue, Singh said.

"It is a step in the right direction since the regulator expects the insurers to maintain their existing cost efficiencies by inserting the clause of capping expense rate—calculated as the average of last three years actual expense ratio or 30%, whichever is lower," Singh said.

Prithvish Uppal, insurance analyst with AMSEC, expects the move to boost competitiveness through cost efficiency.

According to him, insurers that enjoy scale will 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, he said. "This move could, therefore, prove disadvantageous to them (small insurers)."

Queries emailed by BQ Prime to ICICI Lombard General Insurance Co., Bajaj Allianz General Insurance Co., SBI General Insurance Co., Star Health and Allied Insurance Co., Edelweiss General Insurance Co. and Aditya Birla Health Insurance Co. remained unanswered.

Additional Expenses Allowed In Draft Rules:

• The regulator has allowed a maximum of 10% of expenditure incurred towards rural sector, Pradhan Mantri Suraksha Bima Yojana, Pradhan Mantri Jan Arogya Yojana and Pradhan Mantri Fasal Bima Yojana business.

• It allowed additional expenses to the extent of 20% towards insurtech expenses.

• All expenses for implementation of Indian Accounting Standards are allowed.

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

• An additional 2% expense has also been allowed towards insurance awareness.

According to Roy of PWC, the provision of separate expense allowances for insurtech and IndAs is a move towards global standards and customer orientation as these are quantum jumps and not business-as-usual expenses.

The regulator has invited comments and suggestions on the draft up to Aug. 22.