The Insurance Regulatory and Development Authority of India (Irdai) has introduced an exposure draft on Expenses of Management (EoM) and commission for both life and non-life insurance companies. This initiative is in line with the recommendations of the Regulation Review Committee (RRC), advocating the consolidation of commission and EoM regulations into a single, comprehensive framework.
Background: Regulatory Evolution and Rationalization
Irdai had previously instructed councils to form the RRC, aiming to streamline business processes, simplify regulations, and transition towards a principles-based regulatory regime. The RRC proposed the Irdai (EoM, including commission, of insurers) Regulations 2023, replacing three distinct regulations:
1. Insurance Regulatory and Development Authority of India (EoM of Insurers transacting General or Health Insurance Business) Regulations, 2023
2. Insurance Regulatory and Development Authority of India (EoM of Insurers transacting Life Insurance Business) Regulations, 2023
3. Insurance Regulatory and Development Authority of India (Payment of Commission) Regulations, 2023
Exposure Draft Highlights
The exposure draft maintains a 30% and 35% limit on EoM for general insurers and standalone health insurers, respectively. Life insurers are advised not to exceed 5% of all single premiums on policies such as immediate annuity and deferred annuity, and 10% on group pure risk policies. Noteworthy changes in the draft include a revised limit of 14% for all individual risk policies, up from the previous 10%. The allowance for one-year renewable group policies, excluding group fund-based policies, is set at 15%.
For group fund-based policies, the allowable EoM will be determined based on the average Assets under Management (AUM) at the beginning and end of the financial year. The draft introduces tiered allowances based on AUM, with rates set at 1% for AUM up to Rs 10,000 crore and 0.80% for amounts exceeding Rs 10,000 crore.
Industry Perspectives and Response
Industry experts appreciate the effort to simplify regulations, emphasizing the intention of the RRC in merging the existing rules. While awaiting detailed analysis, professionals note the exposure draft's potential for more comprehensive reporting to the regulatory authority.
Bikash Choudhary, Chief Actuarial & Governance Officer at IndiaFirst Life Insurance, commented, "Prima facie, it appears to be a merger of two regulations, the EOM, and commission regulations, notified on March 26, 2023. However, there seems to be more detailed reporting to the Authority on the expenses of management."
Regulatory Objective and Additional Allowances
Irdai emphasized that the proposed regulations aim to provide insurers with flexibility in managing their expenses, enabling optimal resource utilization for the benefit of policyholders and fostering increased insurance penetration. The draft introduces additional allowances for insurers with branches outside India or in the International Financial Service Centre (IFSC) Insurance Office (IIO), including Head Office Expenses not exceeding 10% for non-life insurers and 5% for life insurers.
Additional allowable expenses cover government schemes and initiatives, with a 15% allowance for schemes like Pradhan Mantri Suraksha Bima Yojana and 5% for promoting insurTech and insurance awareness. These regulations are anticipated to come into effect from April 1, 2024, and will remain applicable for three years. Stakeholders have until December 6, 2023, to provide their feedback on the proposed regulations.
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