Big insurers, bigger advantage? Smaller players flag Irdai’s new expense caps

Smaller life and general insurers are concerned that the Insurance Regulatory and Development Authority of India’s (Irdai) proposed distribution reforms could give larger players an advantage, Times of India reported, as companies with sizeable group businesses may be better placed to absorb costs within the proposed expense limits.

Under the proposed norms, Irdai plans to lower the company-level expense of management (EoM) limit for general insurers to 20% of gross direct premium income over five years. For life insurers, the cap is proposed at 15% in two years, followed by 12.5% or 10% over five years.

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Smaller insurers fear that an aggregate company-level cap could affect them disproportionately because their businesses are more heavily weighted towards retail policies. Retail insurance typically involves higher acquisition and underwriting costs as well as larger distributor payouts, leaving less headroom within an overall EoM ceiling.

“The council will discuss the new norms before submitting feedback to the regulator,” the CEO of a general insurer outside the top 10 told Times of India.

A similar concern was raised by the CEO of a smaller life insurance company, who said the proposed framework could potentially push the industry back towards practices seen before 2023, when commission caps were in place and distributors were offered incentives through mechanisms such as expense reimbursements and marketing support.

Large insurers, by comparison, may be able to use the scale of their group business to keep their overall expense ratios lower. Group insurance generally involves lower acquisition and servicing costs, allowing insurers to generate substantial premium volumes at relatively low expense ratios.

For instance, a life insurer with Rs 10,000 crore of group business and a 4% expense ratio could use that lower-cost premium base to offset higher expenses incurred on individual policies while still remaining within an aggregate EoM cap. The example is illustrative of how a larger group book could provide greater flexibility under a company-wide expense ceiling.

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Smaller insurers argue that this could allow larger players to retain greater room for distributor payouts while also spending on technology and marketing. They fear this could strengthen the ability of large insurers to compete for bank tie-ups and relationships with large broker networks.

The concern centres on the absence of separate expense sub-limits for group and retail businesses. Smaller insurers say a company-wide cap could allow players with large group books to use their economies of scale to absorb the higher costs associated with retail distribution.

The industry is now expected to examine the proposed norms before submitting its feedback to Irdai. For smaller insurers, the key issue will be whether the new aggregate EoM limits create a level playing field across insurers with significantly different business mixes and cost structures. (With inputs from Times of India)