Insurers face expense scrutiny

Insurance regulator may link solvency margin with management expenses.

The insurance regulator is taking a closer look at unbridled expansion by companies and those ignoring customer grievances.

Insurance Regulatory and Development Authority (Irda) Chairman J Hari Narayan today said companies that did not lower management expenses below the prescribed ceiling would have to set aside more capital to meet the proposed higher solvency requirement.

Elaborating on the regulatory agenda for the next decade at the Business Standard Insurance Round Table, Hari Narayan said higher solvency was one of the options being considered to get insurance companies to cut management expenses, which include operating costs such as wages, commissions, business acquisition cost and expenses on marketing and advertising.

“Management expenses affect the bottom line more sharply. We do intend to tackle it in various ways by looking at extra solvency requirements for companies that do not comply with the management expense limits prescribed in the Act,” he said.

Last year, Irda asked six insurance companies to reduce management expenses which are now capped at 23 per cent of the gross direct premium for general insurance companies. Life insurers have to cap management expenses at 22 per cent of their overall expenses after five years of operations.

Irda has prescribed a solvency margin of 150 per cent, which means that insurance companies have to provide Rs 150 for risk worth Rs 100 that they underwrite. A higher solvency margin for errant companies will require the promoters to infuse more capital.

For the company managements too, Irda is tightening scrutiny by building an electronic platform on which complaints can be accessed. Hari Narayan said the system, which was being tested, would be in place by July.

“This would ensure that whatever is offered in terms of policy holder welfare is actually being delivered,” said Hari Narayan.

Around 50 million policies are sold annually and the number of complaints was estimated at 200,000.

Speaking at the round table, Aviva Life Insurance Managing Director and CEO T R Ramachandran said customer grievance redressal would become another parameter on which customers would be able to judge a company’s performance. This would help them take an informed decision.

On the regulator’s proposal to link solvency margins to expense management, he said insurance companies using bank branches to sell policies were better equipped to deal with the situation.

SBI Life Managing Director and CEO M N Rao said his company, which generated 57 per cent of its business through State Bank of India branches, had an expense ratio of around 14.5 per cent at the end of December.

“We have the lowest expenses... Since we have gone for the bancassurance model, the ability of bank branches to market these products have resulted in infrastructure cost saving and it is the prime reason for our expense ratio to be the lowest in the industry,” he added.

“For start-ups, the regulator provides some room. Also bank-promoted insurers run under cost effective model so it would not be a challenge for us,” said IndiaFirst Life Insurance MD & CEO P Nandagopal. The company is a joint venture between Bank of Baroda, Andhra Bank and Legal & General UK.

Asked about the challenges over the next decade, Iffco Tokio General Insurance MD & CEO S Narayanan said that the penetration level was low.

Besides, Tata AIG General Insurance MD & CEO Gaurav Garg said customer education and awareness should be a key focus area. In addition, he said, the regulator should back the private sector players as customers were more biased in favour of public sector companies.

“The Indian mindset is that if the government is behind it (a company), we are fine. When you talk of consumer awareness, if the regulator were to come out (and say), ‘I am ensuring you whichever company is licensed by me, is there to last’, the regulator is showing security to the buyers,” Garg said.