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C. Shivkumar

Bangalore, Jan. 4 The Ministry of Finance has proposed removal of the statutory ceiling on management expenses of all the insurance companies in the country.

The Insurance Amendment Laws (Amendment) Bill, tabled in the Rajya Sabha in mid-December, involved amendment to the multiple statutes – The Insurance Act of 1938, the Insurance Regulatory and Development Act, Life Insurance Corporation of India Act, the General Insurance Business (Nationalisation) Act.

Non-life insurers management ratio ceiling is fixed at 19.5 per cent of the gross direct premiums. The management ratio is a prescribed cost cap on wages, dividends and commissions. The amendment to the Section 40C of the Insurance Act proposes removal of this ceiling.

The Chairman of the General Insurers Public Sector Association, Mr M. Ramadoss, said, “There is no waiver of the ceiling. The proposal instead involves ceding the authority to fix ceilings on management expenditure to the insurance regulator.”

Most of the insurers, both public and private, had aggressively pushed for reworking the ceiling. Insurers had cited the banking sector, where no such ceiling existed. This allowed them to expand business. However, insurers, barring the public sector Oriental Insurance Company Ltd, are already operating well above the current ceiling.

Moreover, private sector insurers were given a time limit of six years in 2001 for complying with the ceiling. Private sector insurers, even after an extension of one year, are yet to comply with the ceiling. Industry sources said that some of the private sector insurers had argued that this was because most of them were still in the process of expanding their business in the country. Consequently, management expenditure was bound to be high during this phase.

In addition, the current year has remained adverse to the insurance sector. This was because premiums across sectors have drastically dropped, after deregulation of risk pricing. Premiums during the year have dropped by as much as 70 per cent in some of the profitable sectors – fire and engineering. As a result, this year, many insurance companies are likely to breach the current prescribed ceiling.

Besides, sources said PSU insurers have already begun paying dividends to the Government effective2006-07. The Government, in addition, was also beginning to exert pressure for enhancing the dividend payouts during the current year.

Public sector insurers consequently have begun pushing for altering criteria for working out the management ceiling. Currently, the ceiling is fixed as an absolute limit on the gross direct premiums. PSU insurers, the sources said, therefore, preferred that the management ratio be linked to the solvency margins (solvency margin is the excess of capital and assets over the insured liabilities) of individual insurers.

Accordingly, this would imply that insurers with high solvency margins, in excess of the IRDA prescribed 150 per cent, would have proportionately higher management expenditure. PSU insurers already have solvency ratios in excess of 200 per cent. Consequently, linking to solvency would result in PSU insurers becoming the beneficiaries.

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