General insurers seek common cap for expenses, commissions

At a time when general insurance companies are looking to enter new markets and increase penetration of products, the industry is looking for a relaxation in terms of the cap imposed on commission and expenses by the regulator. The insurers, have already sent a proposal to the finance ministry, requesting for a common cap on operating expenses and commissions paid.

“This will benefit general insurers in the micro-insurance segment. For instance, the cost of acquiring a customer in smaller towns and rural areas is very high, so such common caps on the commission and operational expenses will help us as we can use that cost in acquiring customers without having to set up offices and branches in smaller pockets,” said Amarnath Ananthanarayanan, managing director & chief executive officer, Bharti AXA General Insurance.

Industry experts added the exiting commission structure and cap are based on the Insurance Act, 1938, and Insurance Rules, 1939.

The chief executive of a general insurance firm said with newer players in the distribution segment like banks and brokers, apart from individual agents, there is a need to revisit the cap on commission. This, would offer competitive prices to customers and good commission to brokers.

This, say industry officials, will help control costs and thereby better price their products.

The current cap on operating expenses has been set at approximately 20 per cent, whereas the commission on products (health, motor and others) ranges from 10-15 per cent.

Now, these insurers are seeking a 30 per cent common cap for all expenses, including management expenses and commission, so that people bringing in good business can be adequately rewarded.

An official at Future Generali India Insurance said this would help insurers control costs.

“The cost of acquisition is low on younger customers compared to the older ones; hence, they can utilise the saved cost elsewhere if the individual cap is removed. Insurers wish to club these together and have a common cap so that they can decide what they wish to spend on under one heading,” said the official.

The insurers, lead by the General Insurance Council have already made a request to the finance ministry, wherein they have said that this common cap should be allowed, as long as the company has a combined ratio of below 100 per cent and make underwriting profits. “We have a rule-based commission system, which we want to replace with a principle-based system,” said an insurance official.

However, the insurers said that this will take a long process to be implemented. An industry official said that the insurance regulator will not be considering this, on an immediate basis. The official added that while discussions were taking place, since this would entail structural changes in the system, implementation would take a long time.

Recently, the Department of Financial Services (DFS), had said that public sector general insurers can themselves determine acquisition costs for each age group provided that the combined ratio does not exceed 100 per cent and management expenses are well within the limits of the Insurance Act. This was decided after the public sector unit general insurers made a representation that the earlier rules were affecting their business.

In September last year, DFS had directed these insurers that in the individual health segment, the acquisition cost should be restricted under 15 per cent for the insured below the age of 35 years, 12 per cent for between 35 and 45 years and 10 per cent for 45 years and above. Further, DFS had earlier said that for third party motor insurance, the commissions/ brokerage/ discounts/ other incidentals shall not go beyond 35 per cent. In its directive, DFS has now deleted this requirement provided that the combined ratio does not exceed 100 per cent and management expenses are well within the limits of the Insurance Act.