India: Regulator to rein in insurers which exceed expense limits

The Insurance Regulatory and Development Authority (IRDA) has said that it would be enforcing the management expense limits of life insurers as prescribed by the law, so as to ensure that returns to policyholders are not compromised by excessive expenses.

The insurance regulator said that it had been giving the industry enough leeway in terms of exceeding the limits on expenses, the Livemint news website reported citing an IRDA discussion paper.

According to the discussion paper, if excess expenses are loaded, insurance products would not be viable. The surplus under with-profit products will be reduced, as will bonuses. So, policyholders may not find the benefits or bonuses of insurance policies attractive. This may lead to the an overall business loss, which impacts shareholders’ confidence. To address these concerns, the discussion paper aims to keep expenses within the regulatory limits.

The expenses of insurance companies governed by the law include all commissions and other operational and administrative expenses. The limits depend upon the age of the insurance company, its business in force calculated in sum assured and the term of the products sold. For instance, for insurers that have completed 10 years of operations with business in force of at least INR100 million (US$1.62 million), for a regular life insurance policy with a premium paying term of more than 12 years, the insurer can deduct up to 90% of premium in expenses in the first year and up to 15% of the renewal premium. For insurance companies that have been operational for less than 10 years, the limit is higher.

“Insurers that are less than five years old usually get an exemption,” said an actuary of a life insurance company. But other insurance companies have been given leeway from time to time, he said.

IRDA wants to enforce the rules strictly as many of the 24 life insurers in the country have been in the business for at least 10 years now. “Life insurance business by its very nature has huge costs in the initial years. But now that almost 90% of insurance companies are more than 10 years old, IRDA wants to implement the cost caps strictly,” said an executive of a private life insurance company.

Source: eDaily