Mr. Tapan Singhel, MD & CEO, Bajaj Allianz General Insurance

 Insurance is critical to financially safeguard every citizen of the country, yet the penetration is less than ideal. One of the biggest problems that the Indian Insurance industry suffers from is that of perception. This is an industry that continues to pay claims and continues to bleed; the industry combined ratio stands at about 118%. Despite such a high combined ratio, the industry suffers from trust issues. The unhealthy combined ratio has continued to impact many insurers and had an adverse impact on their viability and long-run sustainability. However, the current IRDAI regulator is working relentlessly to introduce measures that will help improve the long-term sustainability of insurers and thus enable them to reach further to the grass root level and address customer worries. 

IRDAI has come out with Expense of Management (EOM) norms for non-life insurance companies, an important move for the customers and industry. The regulator has revised the limit of EOM for General Insurance and Health Insurance companies; the revised limit stands at 30% and 35%, respectively. The revision is done in consultation with the insurance industry. The regulator has removed the cap on the payment of commissions to insurance agents and intermediaries. Now there will be no segmental limits or product-level limits. All these will be incorporated into the EOM as per the prescribed limits. Simply put, now the insurers have to manage the cost of acquisition and broad cap of management expenses within the revised limits. The new regulations will come into effect from the upcoming financial year, i.e., 1st April 2023.

This is a welcome move and will positively impact various stakeholders. It will enable the insurers to improve their overall growth, serve their customers better, and forge a more robust relationships with their distributors. Let us quickly understand the possible impact that the new regulation will have on customers, insurers, and distributors.

Implications for insurers and distributions: The move will bring greater flexibility for insurers to manage expenses and commissions as there will be no sub-limits in them. Varying business models will have different cost structures based on their business priorities. There might be insurers that are more direct to customers, they may have higher expenses and almost no commissions, whereas distribution-driven insurers may have higher commissions but lower expenses, the cap on EOM will bring in parity depending on their business models. The industry will be able to focus on under-penetrated markets and provide innovative and relevant products. The combined ratio for the industry is 118.5% (if we look at FY'22 figures), and with these EOM limits, we foresee better profitability, combined ratios, and better solvency. This will greatly help with the “health” of the industry and will move it in the right desired direction.

Implications for customers: Even a cursory view of the figures of FY'22 shows that about half the industry is at more than the prescribed limits of EOM; hence the industry needs to bring it to 30% or below. It will greatly benefit the customers if EOM discipline comes through; with better sub-limits, we will see more innovation in products, better cost structures and thus, a wider choice for customers. Insurers, too, will move to more regions and expand their presence in tier III and tier IV towns. The move will go a long way in taking insurance to the grass root level and bringing more Indians under the protection of insurance. We also envision insurers developing new business models and innovative products. We will see an influx of more distributors in every part of the country and thus facilitating the penetration of insurance to the last mile.

This one move will have a cascading effect and significantly improve the way the Indian Insurance Industry operates. EOM discipline will greatly improve the industry's combined ratio, thus improving the solvency ratio. This will, in turn, nudge the insurers to explore new business avenues, enter new markets, and form new distribution channels and design innovative products and services. This will augur well for the customers in the long run, who will have improved products and services.

We firmly believe this will render greater flexibility in managing expenses for insurers. With most insurers above the prescribed norms of expenses and with the industry at a combined ratio of more than 118%, these EOM limits will help bring cost discipline and take the industry in the right direction of prudency and profitability. This will translate into better pricing and products for customers, who will now also have wider distribution access. The Indian Insurance industry is at an inflection point, and such brilliant moves will nudge the industry in the right direction, toward sustainable growth and profitability!