In our first part, we saw what constitutes expenses of management and what are the current regulations in force for controlling expenses of management.

 In this write up, we see the genesis of these regulations and how the laws pertaining to expenses of management were arrived at so as to control them. To reiterate, 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 India, the Insurance Act lays special emphasis on controlling the expenses of management both in case of life companies and non-life companies. The relevant law in case of life companies is Section 40B which lays down limits of expenses of management that can be incurred that is linked to the class of life business. In case of non-life companies, Section 40C of the Insurance Act read with Section 17E of the Insurance Rules, lay down the criteria for determining the expenses that can be chargeable to policyholders.

 Section 40C of the said Insurance Act (as amended) pertains to– Limitation of expenses of management in general, health insurance and reinsurance business and states that:

 Every insurer transacting insurance business in India shall furnish to the Authority, the details of expenses of management in such manner and form as may be specified by the regulations made under this Act; The relevant regulations under this Act were the IRDAI (Expenses of management) regulations for non-life companies that came in 2016. (This was discussed in brief in the earlier article)

Some of the key statutes that were there before the commencement of the regulations are as follows:

 1) After the 31st day of December, 1949, no insurer shall, in respect of general insurance business transacted by him in India other than marine insurance business, spend in any calendar year as expenses of management, including commission or remuneration for procuring business an amount in excess of the prescribed limits and in prescribing any such limits regard shall be had to the size and age of insurer:

 Provided that where an insurer has spent as such expenses in any year an amount in excess of the amount permissible under this sub-section, he shall not be deemed to have contravened the provisions of this section, if the excess amount so spent is within such limits as may be fixed in respect of the year by the Authority after consultation with Executive Committee of General Insurance Council constituted under Section 64F, by which the actual expenses incurred may exceed the expenses permissible under this sub-section.

 This gave the General Insurance Council a leeway to fix the limits for which the expenses of management can be incurred in consultation with the Authority, earlier. (These were removed in the amended Act in 2015 that was passed by Parliament)

There was a reference to “Calendar year” in the Act. Prior to 1988, the calendar year was the financial year for all insurance companies and banks including financial institutions. After the 1988 budget, the financial year was made compulsorily to tally with the Central Govt’s financial year i.e. year ending 31^st March. The Council was supposed to give the limits up to which expenses of management can be incurred to the Authority within 3 months from the end of the calendar year.

This became the principle for giving forbearance to companies who had exceeded the limits of expenses of management under 64M of the Insurance Act. This also relates to the fixing of limits for expenses of management for any year by the Authority (IRDAI) in consultation with the Council, as stated above in an earlier paragraph.

There is also a reference to the Insurance Rules, 1938. Rule 17E calculates the limits in respect of general insurance business transacted in India other than marine insurance business by any insurer, spend in any calendar year as expenses of management, including commission or remuneration for procuring business an amount exceeding the sum of:

• The amount of commission or other remuneration paid to insurance agents and principal agents in respect of that business transacted in that year but not exceeding in respect of fire insurance business, 5 per cent and in respect of miscellaneous business 10 percent of the gross premium income written direct in India in respect of that business in India;

• An amount computed on the basis of the percentage appropriate to the various parts of total gross premium income written direct in India during the year:

This was the magna carta for calculating the Expenses of Management limits. This rule has been scrupulously followed all these years in calculating the limits, which were as follows:

So what is observed is that the old limits laid down in British times is tweaked for inflation and base rate of premiums and calculated accordingly.

In our last part, the problems which the industry still faces in complying with the management expenses regulations and the effect of the new regulations that have been published recently would be discussed.