Decryption of the IRDAI exposure draft for insurance companies


Even 20 years after liberalisation, non-life insurance penetration in the country is at levels below potential, rising from 0.50 percent of GDP in 2002 to 1 percent in 2021. Some say that the lower penetration is due to a larger denominator, while others say insurance is not growing as much as other sectors. By contrast, global non-life insurance penetration is currently above 4.1%.

India offers huge opportunities to develop its under-penetrated non-life insurance market to par with global levels. Thus, greater investments are needed in distribution infrastructure, products, technology, service innovation and other similar initiatives to popularize insurance in the country. Since liberalisation, the insurance sector has been subject to strict governance of investments and expenditures. In fact, it was a necessity at the time as the industry opened up to the private sector. Capital protection and maintaining minimum levels of solvency were paramount.

The industry has long been eagerly awaiting a relative loosening of spending limits and investment choices to satisfy its appetite for growth. One such long-standing petition is the “single expense limit” for insurers.

Regulatory control of an insurer’s expenses prior to this Exposure Draft (on Management Expenses of General Transaction Insurers or on Health Insurance Business Regulations, 2022) was at the micro level. There were limits on compensation, commission and rewards for insurance intermediaries at the product and category level, in addition to an overall spending limit for insurers. These spending limits have precisely prevented insurers from having the choice to invest more in distribution, either in the form of commissions and rewards to intermediaries, or in innovation in service offerings.

“Discipline the Disciplined”

The exposure draft published by IRDAI in early August addresses most of the challenges. It envisions a single company-level limit for expenses other than commission and compensation. However, IRDAI subsequently issued another exposure draft on commission and compensation for intermediaries and other insurance distributors, removing any sub-limits from the structure. It is understood that the sub-cap on fees and remuneration in the overall Management Fee is a statutory imposition rather than a Regulatory Act.

Few areas in the Exposure Draft require discussion. The methodology for calculating the eligibility of the limit, based on the average management expenditure (EdM) of the previous three years, as proposed in the exposure draft, could create a scenario of “discipline only the disciplined” by setting a lower limit for insurers, who run their business with lower costs. expenses. In addition, the expense rate concept could limit business growth, as it would force insurers to grow only with the average expense of the previous three years.

Public social insurance schemes normally have lower expenditures due to the large divisor effect. Insurers with greater exposure to these plans traditionally have lower lifespans, as these plans significantly reduce lifespans at the company level.

Under the proposed expense management structure, insurers would have a lower “rate of insurance” with no certainty that they would be able to participate in government plans each year at the same level. Over the course of a year, if one of these insurers fails to take advantage of a government offer to participate in the programs, it could be subject to an ongoing spending restriction for years.

Such restriction not only tightens their business operations, but also prevents them from growing for at least three consecutive years. The concept would be similar to business insurance portfolios. This apprehension of insurers could discourage them from participating in large insurance portfolios, such as government plans or large commercial enterprises, with little certainty of renewal. When it comes to allowances, among the sectors devoted to allowances, the one that deserves it more than others is the retail healthcare segment. Even though Covid has increased health insurance awareness, the country still has a long way to go before demonstrating respectable health insurance penetration.

Despite all these uncertainties, IRDAI’s attempt to free the industry from the constraints of tiered spending limits would certainly unleash a cyclical force to grow the country’s insurance market. As the market grows, the impact of spending automatically decreases.

The author is Managing Director and CEO, Universal Sompo General Insurance

Published on

September 25, 2022


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