IRDAI Sets Overall Cap For Life Insurers' Expenses
The regulations will come into force from April 1 and remain in effect for a period of three years.
The Insurance Regulatory and Development Authority of India has approved a single limit for management expenses of life insurers in a given year across segments.
In a notification dated March 26, the IRDAI approved the proposal for removal of segment-wise capping for commission and expenses, allowing life insurers to manage their expenses within the overall limits based on their gross written premium.
Regarding the formula for the limit, the permissible costs are based on an amount that is calculated depending on the prescribed percentages in respect of various segments of business written during a financial year. After deriving the amount, the life insurer's board is free to allocate and cross-subsidise their commission and expenses between different products.
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 that is 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 had announced earlier rules for commission, which will allow the insurers to be no longer bound by the regulator's mandated limits on the commissions to be paid for promoting products in different lines of business.
These payments to intermediaries for distribution of insurance products must fall within the overall limits of the management expenses prescribed in the notification and must be decided by the board of the insurer accordingly.
"The updated regulations on commission and expenses of management are a welcome change," said NS Kannan, chief executive officer of ICICI Prudential Life Insurance Co. "The increased flexibility in commission limits will allow insurers to react to market forces in a quicker manner, thereby supporting the IRDAI’s vision of improving penetration of insurance in the country."
The expenses of management have increased allowability in the later years of the policy while limiting expenses in the initial year. This will persuade insurers to work on improving long-term persistence, which in turn will improve the customer proposition as well as the company’s profitability, according to Kannan.
Additional Expenses Allowed
The regulator has allowed a maximum of 15% expenditure against the gross direct premium sourced from PM Jeevan Jyoti Bima Yojana and an allowance up to 15% of the incremental premium sourced from the rural sector.
It allowed additional expenses to the extent of 5% of the permissible expenses of management towards insurtech and insurance awareness.
Expenses towards head office shall not exceed 5% of the gross premium income written directly outside India through foreign branch offices or International Financial Service Centre Insurance Office during the year.
The notification grants 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 a duration of business up to five years.
For insurers having actual expenses of management more than the permissible limit in financial year 2023, 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.