The Insurance Regulatory and Development Authority of India (Irdai) has proposed a single limit for the expenses of general and health insurance firms. This move is expected to bring relief to non-life insurers, especially private players.
According to the exposure draft released by the regulator, non-life insurers cannot spend an amount exceeding 30 percent of the gross premium written as company expense during a financial year.
Currently, insurance companies have to comply with business line specific limits. And, the regulator is seeking to discontinue the practice of segmental compliance of company expenses and its reporting.
Company expenses would include all expenses in the nature of operating costs. They may include commission, brokerage/remuneration, rewards to insurance agents, intermediaries and insurance intermediaries. There may also be commission and expenses on reinsurance inward, which are charged to the revenue account.
The regulator has, however, provided for additional allowances for expenses incurred towards the rural sector. They include schemes like the Pradhan Mantri Suraksha Bima Yojana (PMSBY), Pradhan Mantri Jan Arogya Yojana (PMJAY) and Pradhan Mantri Fasal Bima Yojana (PMFBY).
“An insurer reporting growth in the gross direct premium sourced from the rural sector — the PMSBY, PMJAY and PMFBY — would be given an additional allowance.
The allowance provided shall not exceed 10 percent of the incremental premium over the previous financial year, sourced from the rural sector and the above specified schemes,” the regulator said in the exposure draft.
“There have been some issues regarding the allocation of fixed costs, but now with a composite limit such issues will be addressed. This is good for the industry because it allows companies to invest in areas within the many products that companies have. Certain products need more investment and there is always the concern that one should not exceed the prescribed limit,” said a private sector general insurance executive.
“Any move that limits the company expense is a welcome step because companies today, with so much technological innovation and vast distribution, should reduce their expenses. This will be good for the policyholders in general,” said the chief executive of a general insurance company.
Further, the regulator has said that every insurer will have a board approved policy on an annual basis. This would aim to bring cost effectiveness in the conduct of business and reduction of company expenses on an annual basis
Irdai has also proposed that every insurer should formulate a business plan in advance on an annual basis. It should be on the requirement of capital during the said financial year.
It should also project solvency margin on a quarterly basis and company expense as well as compliance, within the limit set by Irdai.
In case of violation of the limits proposed by the regulator, the insurer may have to maintain additional solvency.
Also, if there is a reoccurrence of violation of the provisions, then the regulator may restrict the performance incentive of the managing director / chief executive officer / whole-time directors and key management persons, among other things.