The Hindu Business Line : Non-life insurers' management spend may exceed prescribed ceiling

Fact file
Management ratio is a prescribed cost cap on wages, dividends and commissions.
Non-life insurers management ratio ceiling fixed at 19.5% of gross direct premiums.
PSUs operating at management ratio of around 24%
Private sector management ratios are in excess of 25%

Bangalore , Jan. 2

Faced with a prospect of shrinkage in premium income, non-life insurers management expenditure is expected to mount well over the statutory fixed ceiling.

Sources said that the decline in premium income stemmed from intense competitive pressure in the industry, as the companies vied to increase their business and undercut tariffs after migrating to the free pricing regime that took effect yesterday. Already, the public sector companies were operating at a management ratio of close to 24 per cent.

Under Section 40C of the Insurance Act of 1938, 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.

Wage hikes

The slippage from the statutorily prescribed ceiling for the public sector was largely on account of the wage increases through negotiated settlements with the unions. The wages were hiked by 12 per cent in 2004. Moreover, the industry is now likely to see one more round of wage negotiations shortly, pushing for further increases in salaries.

Private sector

However, the impact was likely to be even more severe on the private sector. The Insurance Regulatory and Development Authority had extended a six-year reprieve for private sector non-life insurers for compliance with the management ratio in 2001. This reprieve is expected to end this year, though few private sector non-life insurers are compliant with the ratio.

The sources said that the major reason for this was that private sector had also not reached the critical mass for complying with the ratios. Private sector management ratios are currently in excess of 25 per cent. Private sector insurers currently account for about 35 per cent of the market share or about Rs 6 lakh crore.

High ratios

High wage bills, rental payouts and commissions for acquisition of business were largely responsible for the high ratios. Besides, some of the insurers are also under pressure to begin servicing their capital by their foreign and Indian joint venture partners, the sources said.

In fact, in 2005-06, public sector insurers were forced by the Government to cough up dividends for meeting fiscal shortfalls. This was despite the fact that during that period all the PSU insurers continued to have management ratios in excess of 20 per cent of their gross direct premium. This deviation from the statute has set a precedent to the private sector, the sources said.