By Consultants Review Team
Proposing a 30 per cent cap on the expenses of management for Indian general insurance companies, sector regulator IRDAI also wants them to have a policy detailing cost control measures which can be transferred to policyholders by way of reduced premium.
The Insurance Regulatory and Development Authority of India (IRDAI) 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 per cent of actual expenses over projected one and additional solvency is not maintained as stipulated.
However, in the case of new company, the 30 per cent 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 per cent in a financial year, whichever is earlier.
One view is that the 1.5 per cent market share should be scaled down drastically as at the current industry size, it works out to Rs 3,300 crore and a new player will have a free run for a decade.
Similarly, linking the reduction in expense to the pay packets of key officials will actually benefit the policyholders.
With general insurers demanding a single limit for expenses of management, the IRDAI has come out with a draft regulation with a proposal to cap the expense of management at 30 per cent or expense rate, multiplied by gross premium written in India in that financial year, whichever is lower.
The expense rate means the average percentage of actual expenses of management on gross written premium in India for the preceding three financial years.
The regulation also said that there is no change on the cap on the commission paid to the intermediaries.
As per the draft regulation, every insurer should have a board approved policy measuring the reduction in expenses of management on annual basis and passing the benefit to the policyholders by reducing the premium, and allocation/apportionment of expenses amongst various business lines.
An insurer is allowed additional expense allowance for doing rural business, Pradhan Mantri Suraksha Bima Yojana, Pradhan Mantri Jan Arogya Yojana and Pradhan Mantri Fasal Bima Yojana businesses, insurance technology and for implementing Indian Accounting Standards-Ind AS.
In the case of an insurer not maintaining the expense limit, it has to maintain additional solvency and charge the excess of actual expenses over the allowable expenses to shareholders' account.
At a recent interaction between the sectoral regulator and companies, Jasleen Kohli, Managing Director, Go Digit General Insurance said that there is a definite possibility of expenses of management going down by at least five per cent for insurers.
She also urged the IRDAI to draw a roadmap stipulating measures in the next 2/3 years and each insurance company should reduce their EOM by five per cent.
A single limit of EOM, with business line wise limits is important so that savings in one business is not spent on another line, she added.
Welcoming the draft regulations, Susheel Tejuja, Managing Director, Landmark Insurance Brokers Pvt Ltd, told IANS: "Globally, when expense of management limits are set, removal of commission caps for insurance companies logically follows. This will lend further ease of doing business and operational agility, resulting in increased focus of profitability by insurance companies."
Tejuja also said that the focus on Ind AS will have a huge impact in helping insurance companies be IPO ready, making it more transparent and easy to understand for the Indian investment community.