The IRDAI has issued regulations to enable and provide flexibility to insurers to manage their expenses, including commissions, within the overall limits as specified by the authority.
The goal is for insurers to utilise their resources optimally to enhance benefits to policyholders and to improve insurance penetration.
The regulations are called the Insurance Regulatory and Development Authority of India (Expenses of Management, including Commission, of Insurers) Regulations, 2024.
The Regulations shall come into force from 1 April 2024 and apply to life, general and health insurers. They shall be reviewed once every three years from the date of notification which is 22 January 2024.
Requirements under the regulations include:
Board-approved Policy for Expenses of Management
Every insurer shall have a well-documented policy approved by its board on an annual basis for expenses of management, which shall, at the minimum specify the:
(1) Measures to bring cost effectiveness in the conduct of business and reduction of the expenses of management on an annual basis;
(2) Manner of transfer of benefits, arising from reduction of expenses and/or from the directly sourced business to the policyholders by way of reduction in the premium;
(3) Manner in which the compliance with computation of additional allowance shall be ensured;
(4) Manner of allocation and apportionment of expenses of management amongst various business segments including the following parameters, at the minimum:
(a) Expenses which shall be allocated;
(b) Basis of allocation;
(c) Expenses which shall be apportioned;
(d) Basis of such apportionment.
(5) Manner in which compliance with the policy shall be ensured.
The appointed actuary and the chief financial officer shall be responsible for the allocation and apportionment of the expenses of management in accordance with the board-approved policy.
Board-approved Policy for Payment of Commission
Every insurer shall have a written policy approved by the board for the payment of commission. While framing the policy on payment of commission, the insurer shall at the minimum take into consideration the following:
(a) It includes the structure of commission payable;
(b) it is in the interest of the policyholders;
(c) it increases insurance penetration and density in the country;
(d) it is commensurate with the nature and tenure of the insurance policy;
(e) it protects the interest of the Insurance agent, Intermediary or Insurance intermediary and enhances their performance;
(f) it is commensurate with its business strategy;
(g) it is simple to administer and cost-effective.
The board-approved policy shall be reviewed periodically. The policy for payment of commission may be subsumed in the board-approved policy for expenses of management.
Business Plan
Every insurer shall formulate a business plan before the commencement of the financial year, on an annual basis, which shall be approved by the board. The plan shall at the minimum specify the following:
(a) the projected requirements of capital during the said financial year;
(b) projection of solvency margin on a quarterly basis;
(c) the projection of expense of management (in rupees as well as the percentage of gross premium written in India) and the compliance or otherwise with the limits of expenses of management.
The Business Plan shall be monitored by the Board at regular intervals.
Limits on Expenses of Management
No insurer carrying on general insurance business in India shall incur expenses of management in excess of 30% of gross premium written in India in a financial year.
No insurer exclusively carrying on health insurance business in India shall incur expenses of management in excess of 35% of gross premium written in India in a financial year.
No insurer carrying on life insurance business in India shall incur expenses of management in a financial year, an amount exceeding the sum of –
(1) the amount of commission paid to insurance agents or intermediaries in respect of their business transacted in the financial year;
(2) commission and expenses reimbursed on reinsurance inward; and
(3) operating expenses of life insurance business.
The sum shall not exceed an amount computed based on percentages in respect of various segments of business (eg. single-premium policies, individual policies, group policies, etc) transacted during a financial year.
Additional Allowable Expenses
Additional allowable expenses are provided to promote government policies or state-backed insurance schemes. They will be granted towards:
- InsurTech expenses and insurance awareness expenses to widen customer reach
- Head office expenses for insurers with the principal place of business in India and running a branch outside India or operating out of an International Financial Service Centre (IFSC) Insurance Office
- Expenses incurred towards rural sector business, Pradhan Mantri Suraksha Bima Yojana (PMSBY), Pradhan Mantri Jan Arogya Yojana (PMJAY), Pradhan Mantri Fasal Bima Yojana(PMFBY), Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) or such other schemes as specified by the IRDAI.
