Insurance Regulatory and Development Authority of India

Date: 23-11-2022

INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY OF INDIA (EXPENSES OF MANAGEMENT OF INSURERS TRANSACTING GENERAL OR HEALTH INSURANCE BUSINESS) REGULATIONS, 2022

1. The Authority is in receipt of requests to review the Regulations from the stakeholders. Therefore, the current regulations have accordingly been reviewed.

2. The exposure draft of the EoM Regulations 2022 was placed on the website of the Authority for the comments of all stakeholders on 01.08.2022.

3. Detailed deliberations /consultations were also held with the stakeholders in various forums.

4. The comments/ suggestions received from the stakeholders have been examined and incorporated suitably in the proposed regulations.

5. We are in receipt of the comments / suggestions from the stakeholders on the proposed regulations even on date.

6. In order to re-engage with the stakeholders and to consolidate their comments on the revised proposed Regulations, the exposure draft of revised IRDAI (Expenses of Management of Insurers Transacting General or Health Insurance Business) Regulations, 2022, is attached as Annexure – A for their comments/suggestions.

7. Some of the salient features of the draft Regulations are as under: –

(i) The Regulations supersede the IRDAI (Expenses of Management of Insurers transacting General or Health Insurance business) Regulations, 2016;

(ii) Applicability of the Regulations w.e.f. 01.04.2023;

(iii) Insertion of single limit of Expenses of Management as against existing segmental /sub-segmental limits;

(iv) Revision of limits on expenses to: –

a. 30 percent in case General Insurers,

b. 35 percent in case of Standalone Health Insurers, of gross premium written in India in that financial year.

(v) Insertion of additional allowances towards Rural Sector & Govt. Welfare oriented schemes;

(vi) Insertion of additional allowances for expenses towards ‘Insurtech’ and ‘Insurance Awareness’;

(vii) Manner of transfer of benefits, arising from reduction of expenses to the policyholders by way of reduction in the premium;

(viii) Submission of Board approved business plan on the projected capital requirements, projected solvency requirements and projected expenses of management in terms of allowable limits;

(ix) Authority may grant forbearance to new insurers in case of excess expenditure up to first 5 years of ‘duration of business’;

(x) Glide path of three years up to FY 2025-26 for insurers which are not compliant with the expense limits laid down in the Regulations;

(xi) No variable pay to Managing Director (MD) / Chief Executive Officer (CEO) / Whole-Time Directors (WTD) and Key Management Persons (KMPs) for the said financial year in which the actual expenses exceeds the projected expenses by more than 10 percent.

8. All the stakeholders are requested to forward their comments / suggestions, if any, on the proposed regulations (Annexure-A) in the attached format (Annexure- B) on or before 5:00 PM on 14th December, 2022 to finance-nonlife@irdai.gov.in.

Annexure -A

Draft
INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY OF INDIA
NOTIFICATION
Hyderabad, the ___th November, 2022

Insurance Regulatory and Development Authority of India (Expenses of Management of Insurers transacting General or Health Insurance business) Regulations, 2022

F.No. IRDAI/Reg./___/.In exercise of the powers conferred by clause (je) of sub­section (2) of Section 114A read with Section 40B and 40C of the Insurance Act, 1938 (4 of 1938), the Authority, in consultation with the Insurance Advisory Committee, hereby makes the following regulations, namely-

Objective

To enable and provide flexibility to the Insurers to manage their expenses within the overall limits based on their gross written premium to optimally utilize their resources for enhancing benefits to policyholders.

Part-I

1. Short title and Commencement

(1) These regulations may be called the Insurance Regulatory and Development Authority of India (Expenses of Management of Insurers transacting General or Health Insurance Business) Regulations, 2022.

(2) These Regulations shall come into force from 1st April, 2023 and shall remain in force for a period of three years thereafter.

(3) The Regulations shall be applicable to Insurers transacting General Insurance or Health Insurance business.

2. Definition

(1) In these regulations, unless the context otherwise requires –

(i) “Act” means the Insurance Act, 1938 (4 of 1938).

(ii) “Authority” means the Insurance Regulatory and Development Authority of India established under sub- section (1) of Section 3 of Insurance Regulatory and Development Authority Act, 1999 (41 of 1999).

(iii) “Charges” means charge against profits such as income tax and other taxes like Goods and Service Tax(GST) borne by the insurer and other charges which are levied against the profits.

(iv) “Duration of Business” means the duration of an insurer’s business reckoned from the beginning of the financial year of commencement of business if the date of commencement is in the first half of the financial year, and from the beginning of the immediately succeeding financial year if the date of commencement is in the second half of the financial year.

(v) “Expenses of Management” shall include

(a) all expenses in the nature of operating expenses of General or Health Insurance business.

(b) commission to the insurance agents and intermediaries or insurance intermediaries.

(c) commission & expenses on reinsurance inward, which are charged to Revenue Account.

Provided that it shall not include the Charges as defined in these Regulations.

(vi) “Insurtech Expenses” means expenses incurred towards technology-enabled innovation in insurance services (Policyholder oriented) that could result in new business models, applications, processes or products.

(vii) “Insurance Awareness” means awareness creation done by Insurers through (a) direct campaigns including through branches, social media campaign, etc. and/or (b) supporting the General Insurance Council, to educate its customers and public at large in making the right choices by being aware of insurance requirements and role of the Insurance intermediaries and agents,

Provided that it shall not include Insurance Advertisement as defined under IRDAI (Insurance Advertisements and Disclosure) Regulations, 2021 as amended from time to time.

(2) All words and expressions used herein and not defined, but defined in the Insurance Act, 1938 (4 of 1938) or in the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999), or in any Rules or Regulations made thereunder, shall have the meaning respectively assigned to them in those Acts or Rules or Regulations.

Part II

Limit of Expenses of Management in General Insurance Business or Health Insurance Business

3. (1) No insurer carrying on General Insurance Business in India shall incur expenses of management in excess of 30 percent of gross premium written in India in a financial year.

(2) No insurer exclusively carrying on Health Insurance Business in India shall incur expenses of management in excess of 35 percent of gross premium written in India in a financial year.

Part- III

Additional Allowable Expenses

4. In addition to expenses of management limit as specified in sub-regulation (1) and (2) of Regulation 3 above, the insurer shall be allowed the following additional expenses:-

(i) Head Office Expenses

An insurer having his principal place of business in India and having branch offices outside India or having International Financial Service Centre (IFSC) Insurance office (IIO) shall be allowed an additional allowance towards share of Head Office expenses.

Such allowance shall not exceed 10 per cent of the gross premium income written outside India through such branch office or International Financial Service Centre Insurance Office (IIO) during the year.

(2) Expenses incurred towards Rural sector, Pradhan Mantri Suraksha Bima Yojana (PMSBY), Pradhan Mantri Jan Arogya Yojana (PMJAY) and Pradhan Mantri Fasal Bima Yojana (PMFBY) business or such other schemes as notified by Authority

An insurer reporting growth in the gross direct premium sourced from rural Sector, PMJAY and PMFBY or such other schemes as specified by Authority shall be allowed an additional allowance.

Provided that such allowance shall not exceed 15 per cent of the incremental premium over the previous financial year, sourced from the rural sector and the above specified schemes.

Provided further that in no case, such allowance shall exceed the actual expenses of management incurred for the rural sector and the above specified schemes during the previous financial year.

Provided also that in case of PMSBY or such other schemes as are notified by the Authority, such allowance shall not exceed 15 per cent of the gross direct premium sourced during the year from such schemes.

For the purposes of this Regulation, ‘Rural Sector’ shall have the meaning specified under the IRDAI (Obligations of Insurers to Rural and Social Sectors) Regulations, 2015, Regulations as amended from time to time.

(3) Expenses incurred towards ‘Insurtech’ and ‘Insurance Awareness’:

An insurer shall be allowed an additional allowance towards Insurtech and Insurance Awareness expenses to the extent of five percent of allowable expenses of management as specified in Regulation 3 to widen customer reach.

Part IV

Board approved policy and business plan

5. Every insurer shall have a well-documented policy approved by its Board on annual basis, which shall, at the minimum specify:

(i) Measures to bring cost effectiveness in the conduct of business and reduction of the expenses of management on an annual basis;

(ii) Manner of transfer of benefits, arising from reduction of expenses and/or from directly sourced business to the policyholders by way of reduction in premium;

(iii) Manner in which compliance with computation of additional allowance as per Regulation 4 shall be ensured;

(iv) Manner of allocation and apportionment of expenses of management amongst various business segments including the following parameters:

(a) Expenses which shall be allocated;

(b) Basis of allocation;

(c) Expenses which shall be apportioned;

(d) Basis of such apportionment;

(v) Structure of commission payable in terms of IRDAI (Payment of Commission) Regulations, 2022 as amended from time to time.

(vi) Manner in which the compliance with the policy shall be ensured.

Provided that any revision in the policy along with its implication on various segments shall be disclosed suitably under notes to accounts forming part of financial statements.

The Appointed Actuary and the Chief Financial Officer shall be responsible for ensuring that the allocation and apportionment of the expenses of management are in accordance with the Board approved policy.

6. Business Plan:

(1) Every insurer shall formulate a business plan in advance on an annual basis, which shall be approved by the respective Board. The business plan shall, at the minimum, clearly specify the following-

(i) the projected requirements of capital during the said financial year;

(ii) projection of solvency margin on a quarterly basis;

(iii) the projection of expenses of management (in rupees as well as percentage of gross premium written in India) and the compliance or otherwise with the limits of expenses of management.

(2) The business plan formulated as above shall be monitored by the Board at regular intervals.

Part-V

Return of Expenses of Management

7. All insurers transacting General Insurance or Health Insurance business, at the expiration of each financial year, shall prepare with reference to that year, Return of Expenses of Management as per the format specified under Schedule I. The Return shall be signed by the Chief Executive Officer, the Chief Financial Officer, the Chief Compliance Officer and the Appointed Actuary of the Insurer.

8. The Return shall be certified by the statutory auditors of the Insurer and the certificate duly signed by at least one of the statutory auditors shall be filed in the format given in Schedule- II.

9. The Return along with the statutory auditor’s certificate shall be reviewed by the Audit Committee prior to being placed for approval of the Board of the insurer.

10. The Return of expenses of management duly adopted by the Board along with the certified true copy of minutes of the meetings wherein the committee(s) and/or Board of the insurer has approved these documents, shall be filed with the Authority along with returns indicated in sub-section (1) of Section 15 of the Act in the manner and within the time specified therein.

Part- VI

Power to exercise forbearance in case of excess Expenses of Management

11. (1) The Authority may exercise forbearance in case an insurer exceeds the limits of expenses of management. Such forbearance may be exercised on a case to case basis in respect of insurers having ‘duration of business’ upto 5 years.

(2) In case of an insurer having actual expenses of management more than the allowable expenses of management for the financial year 2022-23, the Authority, having regard to the business model of the insurer, may grant forbearance, subject to the confirmation by its board that it shall bring its actual expenses within the allowable limits, within a period of 3 years i.e. by the financial year 2025-26.

Provided that no such direction shall be issued by the Authority unless a representation detailing the business plan has been furnished by the Insurer to the Authority.

Part- VII

Compliances

12. (1) The Insurers shall ensure that their expenses of management are within the allowable limit on the overall basis. Where the insurer has exceeded the limits of expenses of management, the excess of such expenses shall be charged to the Profit and Loss Account.

(2) In case the amount of actual expenses of management exceeds by 10 percent or more of the projected expenses of management as per the Business plan formulated in terms of Regulation 6, no variable pay shall be payable to Managing Director (MD) / Chief Executive Officer (CEO) / Whole-Time Directors (WTD) and Key Management Persons (KMPs) for the said financial year. The Nomination and Remuneration Committee shall ensure the compliance of the same.

Provided that this sub-Regulation shall not be applicable to Insurers having duration of business’ upto 5 years.

13. Additional compliances

(1) In case an insurer exceeds the limits of expenses of management as specified in these Regulations or does not follow the directions issued by the Authority in this regard, it may be subject to one or more of the following:

(i) Excess to be charged to Profit and Loss Account;

(ii) Restriction on opening of new places of business;

(iii) Administer a warning to the insurer;

(iv) Penal action under section 102 of the Act;

(v) Removal of Managerial Personnel and / or appointment of Administrator;

(vi) Restriction on performance incentive to Managing Director (MD) / Chief Executive Officer (CEO) / Whole-Time Directors (WTD) and Key Management Persons (KMPs);

(vii) Any other action as specified in the Act.

(2) The Authority, apart from taking action as enumerated in sub-regulation (1) above, may also direct the insurer not to underwrite new business in one or more segments in case of repeated breach of the limits of expenses or violation of any direction issued by the Authority under these Regulations.

Notwithstanding such directions, the insurer shall continue to service the existing policyholders in such segments.

14. Power to remove difficulties: – In order to remove any difficulties in respect of the application or interpretation of any of the provisions of these regulations, the Chairperson may issue appropriate clarification or circular or direction or guidelines, as and when required, under any of the provisions of these regulations as deemed necessary.

15. Repeal and Savings: -_

(1) Insurance Regulatory and Development Authority of India (Expenses of Management of Insurers transacting General or Health Insurance Business) Regulations 2016 shall be repealed from the date these Regulations come into force.

(2) Unless otherwise provided by these Regulations, anything done or any action taken or purported to have been done or taken in respect of the Regulations mentioned in sub-regulation (1) above shall be deemed to have been done or taken under the corresponding provisions of these regulations.

Chairman

Schedule- I

Return of Expenses of Management

(refer Regulation 7)

1. Name of the Insurer: …………………………………………………………………………

2. Registration No…………………………………………………………………………………..

3. Year of Operation & Duration of Business……………………………………….

4. Financial year: …………………………………………………………………………………..

S. No.

Particulars Amount (Rs in Lakhs)
1. Gross Premium written in India (GWP)

Gross direct premium written in India

Premium on Reinsurance accepted / Inward reinsurance premium

2. Actual Expenses of management

A. Operating Expenses

B. Commission

3. Total Actual Expenses of Management
4. Allowable Expenses of Management
A. Allowable expenses as per sub-regulation (1) or sub-
regulation (2) of Regulation 3
B. Additional Allowance
(a) as per sub-regulation (1) of Regulation 4

(b) as per sub-regulation (2) of Regulation 4

(c) as per sub-regulation (3) of Regulation 4

5 Total Allowable Expenses of Management
6. Difference (5-3)
7. Overall Excess of Actual expenses of management over allowable charged to Profit and Loss Accounts.

It is hereby certified that

a) the computations given above (including computation of additional allowances) are in accordance with the provisions of IRDAI (Expenses of Management of Insurers transacting General or Health Insurance Business) Regulations, 2022;

b) the company has complied with the provisions pertaining to formulation and implementation of the Board approved policy and business plan as specified in Regulation 5 & 6 of the IRDAI (Expenses of Management of Insurers transacting General or Health Insurance Business) Regulations, 2022; and

c) the company has complied with the Regulation 12 of the IRDAI (Expenses of Management of Insurers transacting General or Health Insurance Business) Regulations, 2022.

Date:

Place:

Chief Executive Officer Chief Financial Officer Chief

Compliance Officer

Appointed Actuary

Schedule- II

(refer Regulation 8)

Certificate on Return of Expenses of Management prepared under Regulation …………  of the Insurance Regulatory and Development Authority of India (Expenses of Management of Insurers Transacting General or Health Insurance Business) Regulations, 2022

To the Board of Directors of…… (name of the Insurer)

I/We……………… (Name of the Auditor), the statutory auditors of (name of the Insurer) (hereinafter “the Insurer”) have examined the attached Return of Expenses of Management for the financial year ended…………………. (specify the date) (hereinafter “the Returns” and specified annexures thereto), prepared by the Insurer pursuant to Regulation 7 of the Insurance Regulatory and Development Authority of India (Expenses of Management of Insurers Transacting General or Health Insurance Business) Regulations, 2022 (hereinafter “the Regulations”).

The management of the Insurer is responsible for preparation of the Return. The management of the Insurer is also responsible for preparation and maintenance of the proper books of account and such other relevant records as prescribed under relevant laws and Regulations. This responsibility includes designing, implementing and monitoring of internal controls relevant to the preparation and maintenance of such books of account and records and the particulars furnished in the aforesaid Return.

The management of the Insurer is also responsible for compliance with, inter alia, the requirements of the Regulations. This includes the responsibility to design and consistently implement a Policy for allocation and apportionment of expenses of management, duly approved by its Board of Directors, as envisaged in the aforesaid Regulations.

My/Our responsibility is to verify the aforesaid Return of Expenses of Management. We have carried out our verification in accordance with the Guidance Note on Audit Reports and Certificates for Special Purposes, issued by the Institute of Chartered Accountants of India.

Based on our aforesaid verification and to the best of our knowledge and belief and according to the information, explanations and representations given to us by the management of the Insurer, I / we hereby certify that:

1. The computation of Expenses of Management as contained in the attached Return are in accordance with the Insurance Regulatory and Development Authority of India (Expenses of Management of Insurers transacting General or Health Insurance Business) Regulations, 2022.

2. The apportionment and allocation of management expenses amongst various business segments is in accordance with the policy laid down in this regard by the Insurer.

3. The insurer has complied with the provisions of Regulation 12, the excess of expenses has been charged to the Profit and Loss Account.

4. The apportionment, allocation and accounting of expenses incurred towards insurtech, Insurance awareness, rural sector, Pradhan Mantri Suraksha Bima Yojana (PMSBY), Pradhan Mantri Jan Arogya Yojana (PMJAY) and Pradhan Mantri Fasal Bima Yojana (PMFBY) or such other schemes as specified by the Authority are correct as per books of accounts and records maintained by insurer and as per generally accepted accounting principles.

Place of signature

Date

For XYZ & Co. Chartered Accountants Firm’s Registration Number:

…………………………..

(Signature)

(Name of the Member)

(Designation)

Membership Number

Note: Please furnish the details of deviation/exception, if any observed.

__***___

ANNEXURE B

FORMAT FOR SUGGESTIONS ON

Draft Insurance Regulatory and Development Authority of India (Expenses of Management of Insurers transacting General or Health Insurance business) Regulations, 2022

Change suggested by

Date
Note ♦ It is suggested that ONE Page may be used for one change.

♦ This will enable us to group all the suggestions and take a decision on the changes suggested.

Page No Regulations /Annexure Regulation and Sub-Regulation No./ Para Number Comments/Suggestions Reasons

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