EXPENSES OF MANAGEMENT – THE CURRENT SCENARIO

By S Skandan Consultant GI Council

In the earlier articles, we had seen the intent and history behind the Expenses of management regulations framework. Circa 2023, it is now time to assess the present situation:

 SYNOPSIS OF IRDAI EXPENSES OF MANAGEMENT (EoM) REGULATIONS, 2023

1. IRDAI Expenses of management (EoM) Regulations 2023 for non-life insurers has retained the existing framework and also have provided flexibility to Insurers to manage their expenses within the overall limits based on their gross written premium (GWP) to optimally utilize their resources for enhancing benefits to policyholders.
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 that allows any general insurer or stand-alone health insurer upto 20% of their gross written premium)
3. The maximum amount that can be incurred towards Expenses of Management (EoM) now is 30% of gross written premium in India, for that financial year. In case of stand-alone health insurance companies, the limit is 35% of the gross written premium in India.
4. Apart from the above, additional deductions have been proposed for Rural section business emanating from Rural areas, PMSBY (Pradhan Mantri Sadharan Bima Yojana), PMFBY (Pradhan Mantri Fasal Bima Yojana) or any other schemes that are notified by the authority.
5. An additional allowance of 5 % will also be provided for Insuretech and Insurance awareness expenses incurred in the current financial year.
6. Every insurer has to have a business plan, approved by its Board of Directors that project the Expenses of Management (in amounts as well as % of GWP) and the compliance within the limits of EoM. These limits will also be reviewed by the respective Boards at regular intervals.
7. The Authority has powers to exempt as well as to take action for non-compliance and forbearance.
8. More specifically, The EoM Regulations stipulates that all insurers who are not compliant with the limits in FY 22-23 have to give a declaration by their respective Boards that they hall bring down the EoM levels within compliance limits by FY 2025-26.
9. Forbearance can be made in case to case basis in respect of insurers having “duration of business” upto 5 years.
10. All insurers shall ensure that their EoM shall be within the allowable limits. In case it is exceeded, the excess amount shall be transferred to the Profit and Loss account (to be borne by the shareholders).
11. Penal action has also been prescribed and in cases, where the actual EoM exceeds the projected EoM by 10%, the Authority can withhold the variable pay of the Key Management personnel (KMP) and the Nomination and Remuneration Committee shall ensure compliance of the same. Further penal actions have also been specified in the regulations.

 CURRENT SCENARIO AFTER EoM 2023 REGULATIONS

With the notification of the new EoM Regulations 2016, most of the member insurers should be in a position to comply with the overall limits.

1. New start-up insurers who have been licensed to act as general insurers and standalone health insurers are invited by the GI Council to become its members. On becoming member, most of the member insurers make a representation through the GI Council for granting exemption for the first five years. These are continued to be recommended by the EC of the Council.
2. Public Sector insurers have a large work force and all benefits and salary increases comes through wage agreements which are negotiated with the Ministry of Finance. Similarly benefits like pension/gratuity benefits are also notified by the Govt. These account for more than 75-80% of the Expenses of Management in case of PSU’s. These expenses are in the nature of “fixed costs” and are beyond their control. Due to this some of these member insurers are exceeding the EoM regulations and for the same they apply to the Authority through the GI Council for forbearance. This is also expected to continue for some more time.
3. Some insurers also approach the Authority directly for forbearance after the mandatory five-year period, due to their inability to control EoM.
4. The composition of business has radically changed since 2001 after private sector insurers were granted certificate of registration to enter the Indian insurance sector. Health and Motor Insurance business (both own damage and compulsory third-party business) are now the biggest segment of the Industry generating nearly 75% of the total premium. The ownership of Motor Vehicles (including two wheelers and four wheelers) has also shot up exponentially as compared to the year 2001. Similarly after the COVID pandemic, there is a growing awareness for the general public to take up medical insurance for self and their families.
5. Lastly, there is a growing use of Information technology platform in general insurance, especially Motor and Medical. Increasing use of technology such as giving insurance policies through the dealers, recording of accidents through mobile cameras and passing the information to dedicated call and claim centres etc; have cut the claims processing time, resulting in more on demand service. However, this has come with a very heavy price in the form of huge IT costs.
6. The need to set up an IT platform and also upgrade technologies so as to provide efficient service in a paper less environment has resulted in huge increase in IT costs. This is one of the main reasons why insurers are unable to control the operating expenses and bring the expenses under control. This will continue in the future and insurers will have to approach the Authority for forbearance on increasing technology costs.

INDUSTRY - PROFILE

The member insurers of the General Insurance Council can be divided into five categories:

1. Public sector insurers and Specialised insurers;
2. Private sector insurers promoted by banks and Institutions;
3. Insurers promoted by leading corporate groups / conglomerates / business groups;
4. Other insurers;
5. Standalone Health (mono line) insurers;

 The General Insurance industry is divided amongst the following genre:

1. Public Sector – legacy issues with a large work force, whose salary and benefits outgo are beyond the control of these units;
2. Private Sector insurers promoted by banks/NBFC’s –Here bancassurance/corporate agency plays a key role in procurement of business. They also have captive businesses; e.g. borrowers for loans are generally encouraged to go for insurance in-house taking advantages of group synergies. Hence the cost of business procurement is low.

• Insurers promoted by reputed business groups. As compared to (ii) above, expenses incurred by these member insurers are much higher. Most of these member insurers have tied up with Multinationals and therefore have the benefit of their expertise. After they have come out of the gestation period, their EoM are generally in control.

1. Last are the other insurers in the private sector. These also include the standalone health insurers. They incur expenditure both for attracting new business and in establishment overheads. Standalone (monoline) companies have problems on hand to maintain EoM limits prescribed till they are able to attain critical volumes of premium income.

COMMENTS

1. The Public Sector insurers will continue to face problems regarding expenses of management (75% of the EoM costs go in meeting the salaries and benefits costs of the employees); PSUs were seeking additional limits on EOM considering their legacy issues and manpower costs (including the strain on the EoM due to impending wage revisions and resulting pension liabilities), but the same was not granted. They will be in a disadvantage with private sector insurance companies as their fixed costs are high and their commission margins cannot increase because of these fixed costs, unlike private sector insurance companies.
2. The private sector insurers will face increasing IT costs, establishment and infrastructure costs as it tries to create an All-India network and at a later stage increase in employee costs too;
3. The Stand-alone insurers having only the health insurance business, will have huge overheads as their expenses can only be absorbed by a single segment and the additional efforts involved in selling health insurance policies will lead to increased costs. These may lead to exceeding the EOM limits and filing for forbearance to the Authority. They may need more years of moratorium on EoM than the present 5 years.
4. Moratorium on EoM limits for start-up insurers: Insurers feel that under the current market situation it takes more than seven years for any member insurer to reach a critical level of business and the forbearance on EoM operations should be considered for a period up to 10 (ten) Financial years, excluding the commencement year for start-up insurers..