IRDAI Regulations For Insurers: Cap On Acquisition and Operating Costs, Explained

The Insurance Regulatory and Development Authority of India (IRDAI) has recently introduced new regulations to cap the acquisition and operating costs that insurance companies can incur. This move aims to streamline expenses and promote transparency in the insurance industry. With a focus on cost efficiency and technological advancements, the new framework is expected to impact both traditional insurers and emerging Insuretech firms.

Expense Cap for Insurance Companies

As per the Expenses of Management of Insurers transacting General or Health Insurance Business Regulations, 2023:

• General insurance companies in India cannot exceed 30% of their gross premium in management expenses within a financial year.
• Standalone health insurance companies have a higher cap of 35%.

This regulatory step has been largely welcomed by industry players as it will bring down acquisition costs and eliminate indirect commission payments that have previously attracted scrutiny from GST and IT authorities.

What Constitutes ‘Expenses of Management’?

The term ‘expenses of management’ includes both operating expenses and commissions paid to all intermediaries. Both of these components, when combined, must remain within the prescribed percentage.

Boost for Insuretech and Insurance Awareness

While placing a cap on overall management expenses, IRDAI has introduced a beneficial provision that allows insurers to allocate additional funds—up to 5% of allowable expenses—towards Insurtech advancements and insurance awareness initiatives.

This move addresses a longstanding issue: when insurers implement cost-cutting measures, technology budgets are often the first to be reduced. By separating Insurtech expenses from overall management costs, the regulation reinforces the critical role of technology in:

• Enhancing insurance penetration
• Driving business growth
• Improving operational efficiency

For Insurtech companies, this presents a golden opportunity to work more closely with insurers in areas such as:

• Product innovation for tailored insurance solutions
• Optimized distribution strategies for better market reach
• Customer satisfaction through digital transformation

This regulatory concession serves as a much-needed boost for technological innovations, further encouraging collaboration between Insurtech firms and insurers to reshape the industry's future.

The Need for Customer-Centric Policies

The P&C insurance market is becoming increasingly dynamic, with policyholders demanding more personalized and transparent solutions. To meet these expectations, insurers must move beyond boilerplate contracts and adopt customer-centric, tailored policies that emphasize clarity and simplicity.

Key areas that require transparency include:

• Coverage details
• Add-on covers
• Exclusions and conditions

While homogeneous risks can follow standardized pricing and wording, commercial risks require extensive data analysis for accurate assessment and pricing. This is where Insurtech plays a crucial role.

The Role of AI in Insurance

With the rise of AI-driven technologies like ChatGPT (Microsoft) and Bard AI (Google), technology companies are facing intensified competition—and Insurtech firms are no exception.

To stay ahead, Insurtech companies must:

• Strengthen their expertise with a highly skilled pool of domain specialists and developers
• Leverage AI and machine learning for enhanced risk assessment and automation
• Continuously innovate to provide smarter, more efficient insurance solutions

As AI continues to evolve, only the most adaptive and tech-savvy Insurtech firms will thrive in this competitive landscape.

Conclusion

The IRDAI’s new expense regulations mark a significant shift towards greater efficiency, transparency, and technology adoption in the insurance sector. While insurers must streamline costs, the added allowance for Insurtech highlights the importance of digital transformation. Insurtech companies now have the perfect opportunity to innovate, collaborate, and shape the future of insurance in India.