Expenses of management (EoM) Regulations for non-life companies are essential part of growth and development of any insurance company in India. The compliance with EOM regulations or forbearance due to compelling reasons require a deep understanding of these regulations. Mr S Skandan, Advisor GI Council looking after regulations and accounting dives deep into the subject in a three article series to be carried in this newsletter. The first article of the series gives an introduction of the rules. 

EXPENSES OF MANAGEMENT

What are Expenses of management?

This is a generic term that takes into account all the expenses incurred in servicing the policyholder and running the office. These include fixed costs like salaries, rents rates and taxes, electricity bills, printing and stationery expenses, telephone bills, office upkeep and maintenance, bank charges and depreciation on equipment, travelling and conveyance, advertising and publicity, legal and professional charges, audit fees, remuneration to top executives like CEO, CMD, KMP (key management persons) etc.

Interested readers can look at Form 7 of the public disclosures NL 1- NL47 which are put up by the Insurance companies in their web sites every quarter as part of their statutory disclosures to see what constitutes expenses of management and their break up amount wise.

The main purpose of controlling expenses of management is that they should not be excessive enough so as to harm the policyholders’ interests. These are mostly fixed costs which can be controlled. Therefore, Insurance laws worldwide emphasise control on expenses of management. Excess spending on Expenses of Management is discouraged and is some cases, penalties are also imposed.

In the Indian context, Expenses of management for non-life companies are governed by IRDAI Expenses of management (EoM) Regulations. The gist of these regulations are as follows:

1. IRDAI Expenses of management (EoM) Regulations 2016 for non-life companies has simply retained the existing framework i.e. modification of Rule 17E (of the Insurance Rules, 1938) for framing limits of the amounts that can be spent on Expenses of management.

2. Commission paid to agents have been added as part of Expenses of management as per the practice followed earlier in Rule 17E. (This has been substantiated by bringing new regulations for commission payable to agents and intermediaries).

3. If one notices both these regulations, it is apparent that the rates of Expenses of Management have been left untouched. The maximum limit has been raised to 37.5% in respect of certain lines like Motor retail, health retail etc.

4. The premium figures have been revised for inflation as the old numbers were based on situation pertaining in 1938.

5. Sub classes have been added in the current regulations:
6. Motor was split from Miscellaneous business;
7. Health has also been split from Miscellaneous business and subdivided into three segments: Government business, Corporate, and Retail segments. The limits for expenses have been accordingly adjusted with higher weightage given to Retail and Corporate businesses than to Government business;

• Miscellaneous business again has been split into two: Corporate and Retail. This could be due to the fact that certain lines of businesses like accident, liability etc. is more corporate driven than retail driven.

1. Similarly commission on reinsurance accepted has also been included in the expenses of management following the same method as followed in Rule 17E. (generally companies net out their reinsurance commission by deducting the commission on insurance ceded from the commission paid on reinsurance accepted thereby showing a small amount either as outgo or income. If this is an income, it reduces the EOM figures further)

6. A major change that has been made is that the expense limits have been made applicable to the Gross Written Premium, rather than the Gross Direct Premium.

7. Limits have been prescribed both for segment wise basis and overall basis. It is possible that the company could be compliant on an overall basis but not on a segmental basis. In this case, it has been clearly mentioned that the company will transfer such amounts to shareholder accounts (profit and loss account) in case segment wise limits are breached.

8. Penal action has also been prescribed and the Authority can restrict the remuneration of the Key Management personnel (KMP) and even bar the company from writing such class of business if they continue to violate the limits continuously.

9. It has also been stated that Insurers shall ensure that at segment level, the deviation between the actual incurred claim ratio and the incurred claim ratio projected at the time of filing of the product under product filing procedures shall not be more than ten percent. This is linked with product development and would require collection of information at product level.

10. Where at segmental level, the deviation between the actual incurred claim ratio and the projected incurred claim ratio is more than 10 percent over a period of three years or more, an exception report along with the plan of action specifying the reasons for such deviation shall be filed by the insurers with the Authority in the format to be specified by the Authority.

11. The Authority has exercised their forbearance powers, in the following cases; These were:
12. Granting forbearance for a period not exceeding five years to a new start up member insurer;
13. Examining forbearance representation of member insurers who have exceeded the limits for a particular financial year.

The EoM Regulations made it clear that in these cases, IRDAI shall follow the provisions of the Insurance Act, 1938.  In our next article, we can see the genesis of the regulations governing these Expenses of Management.