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.

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.

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.

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.