IRDAI Disallows Non-Life Insurers From Booking Long-Term Premiums

The Insurance Regulatory & Development Authority of India (IRDAI) has recently implemented a significant change to how long-term policy premiums are reported in the annual accounts. Starting from October 1, 2024, non-life insurance companies will operate under a new policy that changes the reporting of Gross Written Premiums (GWP) and the sharing of commissions. This directive, aimed at improving transparency and reducing discrepancies in commission payments, may lower the industry's premium calculations by approximately ₹25,000 crore.

What Is The New Directive?

Under the new IRDAI rule, non-life insurers can still provide long-term policies; however, they must now report only one year’s premium at a time. Previously, insurers were able to book the entire premium amount for long-term policies upfront, showing it as a single amount in their GWP. Now, this figure must be spread across the policy duration, with only the annual premium recorded each year.

The policy impacts all major segments, including health, motor, and property insurance. According to industry sources, this shift is expected to reshape premium reporting practices and lead to an adjustment of industry numbers.

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Impact On Gross Written Premium (GWP) Calculations

This shift in premium booking practices is expected to lower the annual GWP figures by approximately ₹25,000 crore, according to industry sources. The mandate will affect non-life insurers’ GWP calculations by dividing long-term policy payments over the entire policy term, rather than booking them as a single figure. This more careful approach aims to offer a better view of yearly business performance and revenue generation.

Commission Payments And Expense Of Management (EoM) Rules

The main reason behind this change has been the adjustments to the Expense of Management (EoM) rules, which came into effect in FY24. Before this, some non-life insurers were assigning as much as 70-80% of the premium to commission expenses, while heavily investing in promotional activities to attract business. This led to potential differences in commission payments and large initial costs for insurers.

Under the new directive, commission payments for long-term policies must also align with the annual premium reporting structure, spreading the commission over the policy term. While this practice may lead to a more even spread of expenses, insurers may need to explore new spending methods to attract new business, such as investing in digital marketing and customer experience.

Strategic Shifts For Non-Life Insurers

The mandate from IRDAI could lead to important changes for non-life insurers, potentially resulting in shifts in focus among agents and brokers. With commissions paid in instalments, agents may increasingly turn their attention to products like critical illness and personal accident covers, which often come with upfront commissions. As a result, non-life insurers might need to review their reward systems to remain effective in getting new customers.

Industry’s Response and Call for a New Premium Term

With IRDAI’s new yearly premium reporting rule, the non-life insurance sector anticipates a noticeable decrease in reported GWP figures. To address this change, several industry stakeholders have reportedly engaged IRDAI in discussions to create a new measure, similar to the Annual Premium Equivalent (APE) used in the life insurance sector. This term would aim to provide a clearer understanding of long-term business potential, offering investors and stakeholders a way to better understand yearly performance.

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Expense of Management (EoM) Limits And Their Role

As per the new EoM rules introduced by IRDAI in FY24, non-life insurers can use up to 30% of their total expenses for commissions and operating costs, while standalone health insurers have a cap of 35%. This integration of commission expenses with operating expenses allows private insurers to direct more of their EoM budget into commissions, rewards, and advertising, enhancing their market standing. Previously, these expenses were calculated separately, restricting insurers’ ability to compete in promotional efforts.

Future Outlook: Navigating Regulatory Changes

The IRDAI rule on premium reporting and commission distribution represents a significant shift for the non-life insurance sector. Industry players may need to adopt new methods to maintain an edge over others, possibly reshaping agent rewards and enhancing client retention strategies. As insurers adjust to the new yearly premium system, discussions around a new premium term akin to the life insurance sector’s APE may provide a clearer view of business growth.

In conclusion, IRDAI’s mandate brings more clarity to reporting premiums and commission practices, encouraging a fair approach to managing long-term policy expenses. The directive is expected to make the industry’s financial health more transparent, helping customers, insurers, and regulators.

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