The Insurance Regulatory and Development Authority (IRDA) is tightening rules regarding expenses of management in life insurance companies. This could bring down premiums of participating products, since higher expenses would not be allowed in the participating product segment.
IRDA has asked insurers to opt for the lower of either the expenses as mentioned in file-and-use filing with IRDA or the norms under rule 17D of Insurance Act, 1939.
According to rule 17D, there will be a limitation on expenses of management in the life insurance business. No company is allowed to exceed these expenses in any calendar year. It is calculated as a percentage of the premium (first year and regular premium) and size of the business.
Insurers say that it would bring discipline in expense management. If the limit was breached, the excess amount would come out of the shareholder’s account.
However, on the contrary, some insurers are of the view that it will impact all companies. It will hit the branch and business expansion plans.
On an average, it is capped at 90% of first year premiums and 15% of renewal premiums if the company is in operation for ten years and its in-force business is Rs 10 crores or above. These expenses of management are part of the premium rates of the insurers.
As per Insurance Act, expenses of management means all charges wherever incurred, whether directly or indirectly. In includes commission payments of all kinds and any amount of expenses capitalized, among others. This includes branch expansion expenses.
Life insurance companies, especially in the first five years of their business, have a higher cost head. This is due to expansion in the business, recruiting of staff, and setting up new branches, apart from marketing expenses. Hence, these newer companies might have to maintain a stricter expense ratio.
IRDA’s draft says that insurers would have to compare the limit allowed by insurance rules and the actual expenses, choosing the lower of the two. Further, the expenses for two similar looking products in the participating and non-participating segments cannot be different.
Some participating products tend to have a higher cost than non-participating ones. Hence, if IRDA implements this, charges could come down for customers.
Participating products are those where policyholders are entitled to bonuses from companies and are with participation in profit’s policies. Non-participating policies are where policyholders are not entitled to any share of surplus (profit) during the policy tenure.
IRDA has said that if the expenses are breached up to a stipulated limit, the actuary would have to explain. If the limits are breached even further, both the chief executive and actuary have to explain. At a later stage, if there is a large breach, both would have to visit the IRDA headquarter and give a detailed explanation.