New Delhi, Sept. 26: The Insurance Regulatory and Development Authority (IRDA) has demanded that certain private life insurance companies reveal the break-up of their management expense, hinting that these expenses are on the higher side and is eating into policy holders’ earnings.
Emphasising the need for maintaining checks and balances on the management expenses of life insurers, IRDA chairman C.S. Rao told The Telegraph “most life insurance companies have crossed the stipulated amount thereby violating the law.”
“These stipulations were set after consulting the stakeholders and they need to explain and justify their problems to us and if we are convinced, then we may look into the matter,” he added.
According to the present guidelines, no insurance company is permitted to spend more than 20 per cent of their renewal premium earned on management expenses
However, Rao was unwilling to name the erring life insurers or the percentage of premium incomes that they had spent on management expenses. Sources said that some of these firms had spent up to 50 per cent of their premium incomes on management costs.
Insurers, however, have their own defences to justify higher expenses in inital years.
“It is difficult for life insurance companies to restrict their management expenditure especially during their early phase of operation,”. said R. Krishnamurthy, managing director and CEO of SBI Life Insurance company.
“Though we have slightly crossed the stipulated amount, we are amongst the lowest in comparison to other life insurance companies,” he added.
A senior official from ICICI Prudential said: “Some of the best Asian insurers have restricted their management expenses to 10 per cent or even less. In about five years’ time we will be able to do the same”.
For new insurance companies, management expense comprises costs involved in setting up branches and infrastructure, marketing and brand awareness, recruitment and training of agents and employees, higher depriciation in initial years and acquisition of domain knowledge.
Another private insurer said, “we are of the view that in the initial years of setting up business premium income earned is low. In order to build critical mass we need to invest money and therefore limitations on expenses can severely impair our growth.”
Under section 40 (B) of the Insurance Act 1938, the central government is authorised to prescribe limits on expenses of management. Pursuant to this, under rules 17 (D) of Insurance Act 1939, the government has prescribed limits on management expenses based on the premium income of the insurer.
“We also don’t want commission payments to be included in the ‘management expenses’ as these are already capped under Section 40A of the Insurance Act, 1938.”