Policyholders with participating plans may get hit if insurer crosses budget
High expenditure depress the insurer’s profits and, in turn, shrink the pool available for distribution for policyholders
The Insurance Regulatory and Development Authority of India (Irdai) recently issued an order against Reliance Nippon Life Insurance Co. Ltd for exceeding expenses of management (EoM) beyond the permissible limits. It was found that the insurer’s actual EoM for FY15-16 were ₹1,632.24 crore against the limit of ₹1,069.20 crore.
But as a policyholder should you worry about your insurer exceeding its budget? Yes, if you own a participating insurance policy, which pays dividends from the profits generated by an insurance company. So, if the insurer is not able to bring expenses under control in due course of time, your returns will get affected.
We tell you what’s the issue with Reliance Nippon Life and whether you will be affected in the present scenario.
As per insurance rules, every insurance company needs to furnish a statement of EOM with Irdai periodically. In the case of Reliance Nippon Life, it was found that the percentage of EoM was 153% of the allowable limits, according to the Irdai order.
“The caution received from the regulator pertains to EoM for FY15-16. Over the last three years, the company has adopted stringent cost optimisation measures and has complied with the requirements of EoM for each of the last three years," said a Reliance Nippon Life Insurance spokesperson.
Irdai in its order said that the insurer neither furnished a certificate from the appointed actuary nor did it demonstrate that the interest of its policyholders remained unaffected due to excess of expenses over the prescribed limits. The regulator has, thus, advised that within a period of seven years, if two more warnings are given to the insurer, the authority may undertake investigation.
So what makes insurance companies exceed costs?
Anil Kumar Singh, chief actuarial officer, Aditya Birla Sunlife Insurance Co. Ltd, said whenever a new insurance company is set up, a lot is spent on setting up the infrastructure, training personnel and the distribution system . “Initially, the business generated is significantly lower than the expenses. There is a gap in the beginning but about seven to 10 years later, expenses are quite lower than the growth in business," said Singh.
In the case of Reliance Nippon life that’s been in operation for more than 10 years, overshooting the expenses was largely because of two reasons. First, it ventured into “non-conventional" areas and catered to customers with a wide range of products. Second, given the lack of bancassurance channel during that time (in FY15-16 but they have it now with some small banks), a lot of investment went into setting up long-term agency distribution.
Singh said competition in the life insurance space has increased and many new companies have better distribution abilities due to bancassurance. “This allows them to get a better market share while business growth of companies that don’t have bancassurance becomes difficult. Their book size doesn’t increase fast while expenses keep mounting," he said.
EoM of life insurers are fixed as a proportion of the premiums collected. So if the premium collection is low, the allowed EoM levels would be limited and, hence, the insurer’s capacity to invest would be hit.
Insurance companies constantly explore newer routes of distribution. Many of these experiments fail, especially when a new version of these models is attempted, said Abhishek Bondia, principal officer and managing director, SecureNow.in, an insurance intermediary. “As a result, expenditure increases manifold and is not proportional with the pace of increase in premiums," he said.
Reliance Nippon Life said that new business premium of the company took a significant hit due to “drastic" changes in regulations in FY11 which continued till FY13. Another reason the insurance gave was that between 1 April 2011 and 31 March 2015, more than 200,000 advisers left the company due to unviable commissions.
“Intermediary commissions are regulated in the interest of the policyholder. When capping of Ulip (unit-linked insuance plan) commissions was introduced, many advisers exited the business. The new level of earnings did not cover their existing cost structure. However, adviser attrition in front-line sales force is generally high for a number of reasons, including burnout," said Bondia.
Does it affect you?
Excess EoM normally impacts policyholders who have bought participating products, said Singh. “Irdai has asked life insurers to distribute the declared bonus (investment return) to policyholders. So if an insurer is earning 8% return, it has to pass on the proportionate benefit to the policyholder," he said.
Bondia said high expenditure will depress the insurer’s profits and, in turn, shrink the pool available for distribution for policyholders. “So far, this high expense has not impacted customers as the insurer’s shareholders have been funding bonuses given to customers, as per Irdai’s order," he said. “Shareholders need to do this to be competitive with existing profitable insurers such as LIC. This puts a strain on shareholders and is not sustainable in the long term. That’s why expenses must be brought under control."
In a separate letter to Irdai, Reliance Nippon Life’s appointed actuary said policyholders were not affected by the expense overrun. “Our priority for the interests of our policyholders reflects in the steady improvement in bonus rates over the last three years. The company has returned to profitable growth since FY17-18 and we confirm that the expenses of management outlined in the order have no bearing on the interests of our policyholder," said the company spokesperson.
Though this may not impact policyholders immediately, life insurers exceeding management costs could affect an insurer’s sustainability in the long run if expenses are not brought under control.
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