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Irda proposes to tighten rules on expense management

Draft circular asks companies to opt for the lower of either F&U filing and norms under Rule 17D of Insurance Act

M SaraswathyNeha Pandey Deoras Mumbai
The Insurance Regulatory and Development Authority (Irda) is tightening its noose around the expenses of management in life insurance companies.

If implemented, this will bring down premiums in participating (par) products for customers, since higher expenses would not be allowed in the par product segment.

In a draft circular, it has asked companies to opt for the lower of either the expenses as mentioned in the file and use (F&U) filing with Irda and the norms under Rule 17D of the Insurance Rules 1939. Feedback has to be sent by next week.

Srinivasan Parthasarathy, chief actuary and appointed actuary, HDFC Life Insurance, said this would bring discipline in expense management. If the limit was breached, the excess amount would come out of the shareholders’ account.
 
The Rule 17D mentioned earlier says there will be a limitation on expenses of management in the life insurance business. No company is allowed to exceed these expenses in any calendar year. It is calculated as a percentage of the premium (first-year and regular premium) and size of the business. The appointed actuary at a bank-promoted life insurer said the draft, if made a rule, will impact all companies. “It will hit the branch and business expansion plans,” he said.

On an average, it is capped at 90 per cent of first-year premiums and 15 per cent of renewal premiums if the company is in operation for 10 years and its in-force business is Rs 10 crore or above. These expenses of the management are part of the premium rates of insurers

The Insurance Act says 'expenses of management' means all charges wherever incurred, whether directly or indirectly. It includes commission payments of all kinds and any amount of expenses capitalised, among others. This includes branch expansion expenses.

Life insurance companies, especially in the first five years of their business, have a higher cost-head. This is due to expansion in the business, recruiting of staff and setting up new branches, apart from marketing expenses. Hence, experts say these newer companies might have to maintain a stricter expense ratio.

As noted earlier, the Irda draft proposal says insurers would have to compare the limit allowed by insurance rules and the actual expenses, choosing the lower of the two.

Further, the expenses for two similar-looking products in the participating (par) and non-participating (non-par) segments cannot be different.

Sector experts said some par products tend to have a higher cost than non-par ones. Hence, if Irda implements this, charges could come down for customers. Par products are those where policy holders are entitled to bonuses from companies and are 'with participation in profits' policies. Non-par policies are where policy holders are not entitled to any share of surplus (profit) during the policy term.

The regulator has said if the expenses are breached up to a stipulated limit, the actuary would have to explain. If the limits are breached even further, both the chief executive and actuary would have to explain. At a later stage, if there is a large breach, both would have to visit the Irda headquarters in Hyderabad and give a detailed explanation. Another appointed actuary at a mid-size life insurance company, promoted by a large Indian conglomerate, said this would impact all entities in the segment.

“To be more efficient, we file expenses that are much lower than what is allowed in Rule 17D. If we are asked to go for the 'Lower of the Two' processes for expenses, we will have to file expenses almost at par with Rule 17D. This will be bad for customers,” he said. Newer insurance companies, though they have a higher fixed cost, feel they might not have to immediately bear the impact of this.  A senior executive in a smaller life insurance company explained that some exemptions might be provided to companies which are five years or younger in the segment, so that they can firmly establish their business.

MOVEMENTS CURTAILED?
  • Life insurance companies asked to lower management expenses, including commissions, capital expenses, salary costs and branch operation costs, among others
     
  • ‘Lower of the Two’ formula to be used where the lesser of the expenses mentioned in its filing to the regular and the maximum permissible limit will be followed
     
  • For instance, if a company has mentioned an expense of 20% as against the stipulated limit of 30%, using the above formula 20 % will be the maximum limit in any calendar year
     
  • This will impact expansion of business, especially with respect to branches
     
  • Companies in their early stages of growth with higher costs will be required to limit expenses
 
  • Participating and non-participating products with a similar structure will have similar expense rate
     
  • Differentiated rates charged on par products by some insurers wont be allowed. Good news for par customers as their overall premiums may come down

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    First Published: Nov 08 2014 | 12:21 AM IST

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