Expense Ratio of a Life Insurer
What an insurer spends to run the business, per rupee of premium, and why the formula changes by source.
An insurer's expense ratio is what it spends to run the business, as a share of the premium it brings in. The lower the ratio, the more of each premium rupee is left for claims, reserves and profit.
The catch is that "expense ratio" is not one formula. IRDAI, the rating agencies and analysts each pick a different numerator and denominator. For a life insurer, the regulator's own form is expenses of management divided by gross direct premium.
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IRDAI's Expense Ratios for Life Insurers
From the analytical ratios life insurers report under IRDAI's Master Circular on Actuarial, Finance and Investment Functions of Insurers (17 May 2024).
Expense of management ratio
Numerator
Expenses of management
Denominator
Gross direct premium
Commission ratio
Numerator
Gross commission and rewards paid
Denominator
Gross premium
Business development ratio
Numerator
Business development and sales promotion expenses
Denominator
New business premium
Brand fee ratio
Numerator
Brand or trade mark usage fee or charges
Denominator
New business premium
| Ratio | Numerator | Denominator |
|---|---|---|
| Expense of management ratio | Expenses of management | Gross direct premium |
| Commission ratio | Gross commission and rewards paid | Gross premium |
| Business development ratio | Business development and sales promotion expenses | New business premium |
| Brand fee ratio | Brand or trade mark usage fee or charges | New business premium |
What Counts as an Expense
- check_circleExpenses of management (EoM) are operating expenses plus commission to agents and intermediaries, plus commission and expenses on reinsurance inward charged to the Revenue Account.
- check_circleIncome tax and GST borne by the insurer are charges, not EoM, so they stay out of the ratio.
- check_circleThe commission ratio pulls commission out on its own, so you can see distribution cost separately from running cost.
- check_circleFor non-life insurers IRDAI's list has two versions: EoM to gross direct premium and EoM to net written premium, plus a net commission ratio.
Worked Example
Illustrative figures for one year, in ₹ crore: gross direct premium 1,000, of which new business premium 300; commission 60; operating expenses 90; sales promotion spend 12.
- 1
Add up EoM
Commission 60 + operating expenses 90 = 150.
- 2
EoM ratio
150 ÷ 1,000 × 100 = 15%.
- 3
Commission ratio
60 ÷ 1,000 × 100 = 6%.
- 4
Business development ratio
12 ÷ 300 × 100 = 4%. Note the smaller denominator: new business premium, not total premium.
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Other Versions You Will Meet
Same name, different maths. The full ratio set is on the financial ratios page.
| Source | Expense ratio as defined |
|---|---|
| CARE Ratings (2022) | (Management expense + net commission) ÷ net premium earned × 100 |
| Crisil | (Operating expense + commission expense) ÷ net premium written |
| Value Research | Operating expenses ÷ gross written premium (called the operating expense ratio) |
A Real Figure: LIC
LIC reported an overall expense ratio of 11.91% for the year ended 31 March 2026, down 51 basis points from 12.42% in FY2024-25 (press release, 21 May 2026). The release does not give the formula, so compare it only with LIC's own past figures, not with another insurer's ratio built on a different base.
Expense Ratio and the EoM Limits
IRDAI does not cap a life insurer with one expense percentage. Its expenses of management regulations give an allowance for each segment of business, and actual EoM must stay within their sum. Any excess is borne by shareholders. The segment allowances are set out on the expenses of management page.
Expenses also feed into value. When an insurer's actual expenses run above its long-term target expenses, Milliman calls it an expense overrun, and embedded value can be shown before or after the overrun.
Exam Traps
Check the denominator first: gross direct premium (IRDAI life form), net premium earned (CARE), net premium written (Crisil) or new business premium (business development ratio). A higher expense ratio means lower efficiency, not higher. Taxes are charges, not expenses of management. The combined ratio (loss ratio + expense ratio) sits in the general insurance ratio lists of Crisil and IRDAI, not the life list.
FAQs
What is the expense ratio formula for insurance?expand_more
For a life insurer, IRDAI's form is expenses of management ÷ gross direct premium × 100. Rating agencies use their own variants, dividing by net premium earned (CARE) or net premium written (Crisil).
What goes into expenses of management?expand_more
Operating expenses, commission to agents and intermediaries, and commission and expenses on reinsurance inward. Income tax and GST are excluded.
Is the commission ratio part of the expense ratio?expand_more
Commission is inside expenses of management, so it is in the EoM ratio. IRDAI also asks for a separate commission ratio (gross commission and rewards ÷ gross premium) so distribution cost can be seen on its own.
What is LIC's expense ratio?expand_more
LIC reported an overall expense ratio of 11.91% for FY2025-26, against 12.42% for FY2024-25.
Is a lower expense ratio always better?expand_more
It means more of each premium rupee is left after running costs, which CARE and Crisil read as better efficiency. Look at the trend and the business mix too: CARE studies the ratio by class of business, with its trend.
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