The Insurance Regulatory and Development Authority of India (Irdai) has proposed a 30% cap on the expenses of management for Indian general insurance companies. In an “Exposure Draft” on expenses of management, Irdai has also proposed cost control measures which can be transferred to policyholders by way of reduced premium.
The draft has also proposed curbing of variable pay of the CEO/MD, Whole Time Directors and key management persons, if there is a deviation of over 10% of actual expenses over the projected one and if additional solvency is not maintained as stipulated.
However, in the case of new company, the 30% cap on management expense (operating expenses, intermediary remuneration/rewards, inward reinsurance commission charged to revenue account) will not kick in for the first 10 years or till such time as it attains a market share of at least 1.5% in a financial year, whichever is earlier.
The regulator has asked all the stakeholders to forward their comments and suggestions on the proposed regulations by August 22.
Industry insiders said this is very much in line with the international best practice, and the proposed changes will improve the ease of doing business for the insurers.
It is proposed that an insurer shall be allowed an additional allowance towards the insurtech expenses incurred to the extent of 20% of such expenditure.
Every insurer will have a “well-documented policy approved by its board” on annual basis, which will, at the minimum, cover measures to bring cost effectiveness in the conduct of business and reduction of the expenses of management on an annual basis and 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, among others.
Commenting on the draft guideline on expenses of management of insurers, Sanjay Kedia, Country Head & CEO, Marsh India Insurance Brokers, said, “It is a welcome step and very much in line with the international best practice. It has been a long standing demand of a vast majority of insurers that how they run their business should be left to the business leaders. As to whether they want to use one particular channel of distribution — rely on external distribution, internal sales force — that should be left to the business strategy and to the business leaders.”
“I think this is something which will improve the ease of doing business and help the market develop more efficiently,” Kedia told FE.
Sharad Mathur, Managing Director and CEO at Universal Sompo General Insurance Company, said the exposure draft on ‘Expenses of Management’ in all aspects reflect the regulatory focus on growth of insurance market, persistent innovations, enhanced penetration in the social and rural sector and popularisation of insurance. “Subject to the changes in this draft, that Irdai might undertake consequent to receipt of comments from the stakeholders, the regulatory framework thoughtfully engineered around the proposed regulation would certainly go a long way to ensure all such goals,” Mathur said.
According to Mathur, the increased responsibility of the board of directors of insurers under the proposed regulation demonstrates regulatory priority on self-governance over regulatory control. “Till this time most of the elements of expenses of an insurer were governed by regulatory prescriptions, which although provided a common and standard regulatory platform for the whole industry, used to pose as a challenge for insurers who intend to innovate new ways of doing business,” he added.