Simply Put: Management expenses incurred by insurers

Charan and Tarak meet at their favourite snack joint and an interesting conversation follows.

Charan: Hey Tarak! Did you hear about this new draft on management expenses issued by insurance regulator IRDAI?

Tarak: Yes, Charan. I did.

Charan: Great. Can you give me a gist of what it means?

Tarak: IRDAI has spelt out new regulations for non-life insurers. Now, these regulations will come into effect from April 1, 2023. This draft has provisions about the management expenses of non-life insurers. The new regulations state that the management expenses of a general insurance company cannot exceed 30 per cent of the gross premium written. The health insurance provider’s management expenses are capped at 35 per cent of gross premium written, or in simple terms, the total premiums it collects.

Charan: Ah, ok. But what are management expenses and why cap them?

Tarak: The draft defines management expenses as operating expenses of health and general insurance firms, commissions paid to agents and intermediaries, and commission & expenses on reinsurance inward. In an exposure draft released in August 2022, IRDAI had proposed specific caps on commissions to insurance agents, but in this new exposure draft the regulator has given an overall cap on management expenses. Insurers are free to pay commissions to their agents within the overall management expense limit.

Charan: Will this be beneficial for us policyholders?

Tarak: The regulator expects this move to be beneficial for policyholders. It was common for insurance agents to sell the products that had the highest commission and not products most suited for policyholders. There is no certainty that agents will stop pushing high-commission products after the new rules come through, unless insurance managements themselves curb commissions on categories of insurance.

Charan:  Are the limits placed fair to insurers?

Tarak: The draft allows for certain additional expenditures over and above management expenses. For instance, Expenses incurred for Rural sector or Pradhan Mantri Suraksha Bima Yojana , Pradhan Mantri Jan Arogya Yojana and Pradhan Mantri Fasal Bima Yojana are allowed as additional expenses provided the expense does not exceed 15 per cent of incremental premium over previous years. The draft also allows for insurers based in India but with foreign branches an additional expense of up to 10 per cent of gross premium written outside India.

Charan: Fair enough, but how will IRDAI monitor the insurers?

Tarak: The regulator has specified a format in which insurers have to file “Return of expenses of management.” It must be signed by the CFO and certified by statutory auditors.

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