IRDA asks insurance companies to cut costs, hints at cap on expense ratio
Insurance Regulatory and Development Authority of India (IRDA) chairman T.S. Vijayan on Monday hinted at an imminent cap on insurers’ expense ratio, a move that may force insurance firms to reduce the commission paid to agents, offer customers more affordable products and curb misselling.
While speaking at the annual insurance summit organized by the Confederation of Indian Industry (CII), Vijayan urged insurers to start offering cost-effective insurance policies to customers rather than incentivizing insurance agents with commissions and focusing only on increasing profitability.
“The cost has to come down,” Vijayan said.
“We have an insurance information bureau which analyses various ratios and provides bigger data about the industry. I really want insurers to use the analytics of this bureau. There may be a time when IRDA may put some kind of cap on the expenses of managements. It may not happen immediately, but eventually it may happen. So, insurers have to start working on cost-effectiveness now,” he added.
The expense ratio in the insurance industry is a measure of profitability calculated by dividing the expenses associated with acquiring, underwriting and servicing premiums by the net premiums earned by the insurer. The expenses can include advertising, employee wages and commissions for the sales force.
High expense ratios have been a concern for India’s insurance industry for about a decade.
According to a June 2016 analysis by Willis Towers Watson, the overall expense ratio for the life insurance industry (excluding Aviva Life, Sahara Life and Bharti AXA Life) dropped from 16.3% in 2014-15 to 15.5% in 2015-16 as concerted efforts are being made towards expense rationalization. “The size of the company also appears to be a driving factor contributing to an insurer’s overall expense levels, indicative of economies of scale achieved. Amongst the top five private insurers, ICICI Prudential Life, SBI Life, Max Life and Birla Sun Life have recorded an improvement in their expense ratios compared to 2014-15. It’s noteworthy that state-owned LIC (Life Insurance Corp. of India) continues to maintain the lowest expense ratio of 8.5% in the industry,” it said.