Smaller players flag Irdai’s new expense caps

Smaller insurers are worried that the Insurance Regulatory and Development Authority of India's (Irdai) proposed expense caps could provide larger companies with an unfair advantage. The new rules would limit the company-level expense of management (EoM) for general insurers to 20% of gross direct premium income over five years, while life insurers would have a cap of 15% in two years, rising to 12.5% or 10% within five years.

Smaller companies are concerned that their retail-focused businesses, which often involve higher acquisition and underwriting costs, as well as larger distributor payouts, would leave less room within the overall EoM ceiling.

The CEOs of smaller insurers noted that the proposed framework could potentially revert the industry to practices seen before 2023, when commission caps were in place and distributors received incentives through mechanisms like expense reimbursements and marketing support. In contrast, larger insurers with group businesses might benefit from economies of scale, allowing them to generate substantial premium volumes at relatively low expense ratios. This could give them more flexibility under an aggregate EoM cap.

The absence of separate expense sub-limits for group and retail businesses is seen as a key issue by smaller insurers, who argue that company-wide caps could allow larger players to absorb higher costs associated with retail distribution. This could strengthen large insurers' ability to compete for bank tie-ups and relationships with large broker networks, potentially weakening the playing field for smaller insurers.

The industry now awaits feedback from smaller insurers on whether the new aggregate EoM limits will create a level playing field across insurers with different business mixes and cost structures.