A MF-style plan emerges as insurers fear dark clouds

Mumbai: The insurance sector is contemplating a tiered expense structure, inspired by the mutual fund industry, as an alternative to uniform expense limits suggested by the sector regulator, according to sources familiar with the talks. Smaller insurers are seeking higher EoM (expenses of management) limits on their initial premium base, with the permitted expense ratio gradually decreasing as the insurer expands.

This would provide new and smaller players more room to invest in distribution, technology, and products, while avoiding excessively high expenses as the business grows. For instance, midsize firms are contemplating a model where insurers can have a higher percentage of expenses on their initial premium, with the limit progressively reducing as premium surpasses certain thresholds.

The regulator's proposal would require life insurers to bring their EoM down to 15% of gross direct premium within two years and 12.5% in five years. General insurers would have to reduce it to 25% in two years and 20% in five years. Industry experts argue that a uniform EoM ceiling could disadvantage smaller or newer insurers that lack the scale to spread technology, distribution, and other fixed costs.

They point out that mutual fund regulations allowing a tiered cost structure helped smaller asset managers compete with larger ones. The insurance industry proposes using the total premium as a proxy for scale instead of assets under management. This structure could promote competition and prevent market concentration among a few large insurers, according to one executive.

Insurers are discussing this proposal as part of the consultation process, with the regulator requesting feedback by October 25. The final premiums and EoM will be determined after considering industry feedback.