Expenses of Management: IRDAI's 2024 Regulations

Key Definitions

Expenses of management

All operating expenses of life, general or health insurance business, commission to agents and intermediaries, and commission and expenses on reinsurance inward charged to the Revenue Account. Charges are excluded.

Charges

Charges against profits, such as income tax and GST borne by the insurer. They are not part of EoM.

Commission

Any compensation, including remuneration or reward by whatever name, paid to an agent or intermediary for soliciting, procuring or transacting insurance business.

Insurtech expenses

Spending on technology-enabled, policyholder-oriented innovation in insurance services that could produce new business models, applications, processes or products.

Insurance awareness

Direct awareness campaigns (including through branches and social media) and support to the Life or General Insurance Council for public education. Insurance advertisements are excluded.

Duration of business

Counted from the start of the financial year in which business commenced if it began in the first half of that year; from the start of the next financial year if it began in the second half.

The Board Policies and the Business Plan

• check_circleEoM policy (Reg 3): a well-documented, Board-approved policy, approved every year. It must cover measures to cut EoM and improve cost effectiveness, how savings or directly sourced business are passed to policyholders through lower premium, how compliance with the additional allowances is ensured, how EoM is allocated and apportioned among business segments, and how compliance with the policy itself is ensured.
• check_circleAllocation has four parameters: expenses to be allocated, basis of allocation, expenses to be apportioned, and basis of apportionment. The Appointed Actuary and the Chief Financial Officer are responsible for doing it per the policy. Any revision, with its effect on segments, is disclosed in the notes to accounts.
• check_circleCommission policy (Reg 4): a written, Board-approved policy setting the commission structure. It must serve policyholders' interest, raise insurance penetration and density, suit the nature and tenure of the policy, protect and improve the performance of agents and intermediaries, fit the insurer's business strategy, and be simple and cost effective. It is reviewed periodically and may be folded into the EoM policy.
• check_circleBusiness plan (Reg 5): approved by the Board before the financial year starts. It projects capital requirements, the solvency margin quarter by quarter, and EoM in rupees and as a percentage of gross premium written in India, with a statement of compliance with the limits. The Board monitors it at regular intervals.

Life Insurance EoM Limits (Reg 8)

A life insurer's allowable EoM is the sum of these segment amounts. Actual EoM (commission, reinsurance inward commission and expenses, and operating expenses) must stay within that sum.

Other Limits and Additional Allowances

• check_circleGeneral insurers: EoM up to 30% of gross premium written in India. Standalone health insurers: 35%.
• check_circleGroup regular premium plans with a limited premium payment term and/or a pre-determined policy term count as regular business (split into first-year and renewal premium). Other group plans count as single premium.
• check_circleInsurtech and insurance awareness: an extra 5% of allowable EoM, "to widen customer reach".
• check_circleBranch outside India or an IFSC Insurance Office: an extra Head Office allowance of up to 5% of gross premium written direct outside India for a life insurer (10% for general and health insurers).
• check_circleRural sector growth: up to 15% of the incremental premium over the previous year, and never more than the actual EoM incurred for those sectors in the previous year. For schemes such as PMSBY and PMJJBY, up to 15% of gross direct premium sourced in the year.
• check_circleCommission: total commission on life products, including health products of life insurers, must stay within the EoM limits in these regulations.

Year-End Returns

1. 1

   Prepare the Return of Expenses of Management

   Schedule I for life insurers, Schedule II for general or health insurers. Signed by the CEO, CFO, Chief Compliance Officer and Appointed Actuary.

2. 2

   Statutory auditor certifies it

   The certificate is signed by at least one statutory auditor. The auditor certifies; the auditor does not sign the return.

3. 3

   Audit Committee reviews, Board approves

   The Audit Committee reviews the return and certificate before it goes to the Board.

4. 4

   File with IRDAI

   The Board-adopted return goes to the Authority with certified copies of the Audit Committee and Board minutes, alongside the section 15(1) returns.

5. 5

   Commission return within 45 days

   A separate Board-approved return on payment of commission is filed within 45 days of the end of each financial year, also after Audit Committee review.

Breaches, Forbearance and Segments

• check_circleLife insurers must stay within limits separately for participating policies and for non-participating (including linked) policies, each on an overall basis. Any excess is charged to the Profit and Loss Account (the shareholders' account).
• check_circleLife reporting segments: Linked, Non-linked Non-participating and Non-linked Participating, each split into Life, General Annuity and Pension, Health, and others the Authority specifies.
• check_circleForbearance: available case by case to insurers with duration of business up to 5 years. An insurer whose FY2023-24 actual EoM exceeded the allowable amount could get forbearance if its Board confirmed it would come within limits within 2 years (by the end of FY2025-26) and it submitted a representation with its business plan.
• check_circleVariable pay bar: if actual EoM exceeds the business-plan projection by 10% or more, no variable pay goes to the MD, CEO, whole-time directors and KMPs for that year. The Nomination and Remuneration Committee enforces it. Insurers with up to 5 years of business are exempt.
• check_circleOther consequences of breach: restrictions on opening new places of business, a warning, a valuation of the insurer, penal action under section 102, restriction of performance incentives, removal of managerial personnel or appointment of an Administrator. For repeated breach, IRDAI may stop new business in one or more segments, but existing policyholders must still be serviced.

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