According to the general insurance companies, the current prudential cap on total expenses 28% of the gross direct premium constrain their expansion plans. The ceiling on expenses was brought to ensure that customers do not end up paying jacked up premia for the extravagance of the insurers in terms of astronomical salaries and commissions.
Pitching for a higher ceiling of 32.5-37.5% on overall expenses, insurance firms say their management expenses (costs including on wages, advertising and marketing, fund management and business acquisition) alone are around 20% at present. Besides, they spend 12.5-17.5% of the gross direct premium on brokerage/agent fee and third party administrators commission. Incidentally, international standards on the same are between 32-35%, but they have better management systems, control and monitoring when compared to Indian companies, industry sources said.
The issue was raised by the general insurance companies during a meeting on Monday with finance minister P Chidambaram and attended by Insurance Regulatory and Development Authority (Irda) members. A final decision will be taken by the regulator soon, the sources said. Currently, general insurance companies particularly start-ups and those in a phase of expansion seeking relaxation of 28% ceiling should seek Irdas permission with proper reasons for the same (as the premium collected by such companies will be a small amount compared with established players) and with an assurance that they will stick to the cap as soon as they turn healthy.
In many cases, Irda had asked general insurance companies to bring down their overall expenses as they had exceeded the limit stipulated under Section 40C of the Insurance Act, 1938 and Rule 17E of the Insurance Rules 1939. The regulator had also fined some insurance companies for paying commissions to brokers/agents higher than the prescribed limit.