The previous draft rules on expenses of management (EOM) of life insurance companies were placed under review on August 2, 2022, following suggestions from various industry stakeholders.
The Insurance Regulatory Development Authority of India (IRDAI) has issued a revised draft on expenses of management (EoM), including an increase in expense allowance for annuity and paid-up policies and an additional awareness grant for life insurance firms after review requests from stakeholders.
The previous draft EOM was placed under review on August 2, 2022, following suggestions from various stakeholders . Meanwhile, the draft regulations have been suitably modified after detailed consultations.
Let us look at some of the key regulations.
IRDAI has suggested introducing an objective clause to give flexibility to the insurers to manage their expenses within overall limits based on their gross written premium so that they can optimally utilize their resources to enhance the benefits of policyholders. There is also the proposal of additional allowable expenses up to 15 per cent incremental premium over the previous year for rural sector businesses or any other government schemes as may be specified.
IRDAI had earlier proposed to put limits on the EoM, wherein it said the costs of the insurance companies should not exceed an amount calculated based on percentages in respect of various segments of business written during a financial year. There is also a mention of additional allowable expenses up to 15 per cent of the premium for Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY).
It has also proposed to increase the expense allowance for annuity policies and paid-up policies and additional allowances for Insurance awareness which Insuretech stipulated at five per cent of total allowable expenses for the financial year. The board approved policy on EoM must include measures to bring cost-effectiveness and manner of transfer of benefits arising out of cost reduction to the individual policyholders. It should also include stipulations regarding the payment of commissions to agents/ intermediaries.
Further, it has been stipulated that the authority may grant forbearance to insurers in case of excess expenditure up to five years of ‘duration of business’ instead of 10 years at present. Also, in case, actual expenses exceed the business plan by 10 per cent or more, there will be no variable pay for top positions of MD, CEO, and so on.
In case of new clauses under action for non-compliance, a warning is to be administered to the insurer, giving them an opportunity of being heard. This would also cause a valuation of the insurer to evaluate its financial health and soundness and a restriction of the variable remuneration of MD/ CEO in case of breach of expense limits or violation of directions laid down by the authority.