The needed fillip and the resultant impetus for Insurtech – from Regulator

Introduction

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 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.

Recently, the Insurance Regulator has issued a circular capping the acquisition and operating cost an insurance company can incur. As per the Insurance Regulatory and Development Authority of India (Expenses of Management of Insurers transacting General or Health Insurance business) Regulations, 2023, no insurer carrying on General Insurance Business in India shall incur expenses of management in excess of 30% of gross premium written in India in a financial year. For standalone health companies the percentage is 35%. Many in the industry have welcomed this move. This is bound to bring down the acquisition cost. The indirect way of paying over-riding commission on different expenses head, which has earned the wrath of GST and IT authorities, will be gone.

The term ‘expenses of management’ includes both operating expenses and commissions paid to all intermediaries. Both put together cannot exceed the percentage prescribed.

While putting a cap on overall management expenses, a beneficial provision has been carved out to the insurers to expend an additional amount over and above the percentage prescribed towards Insuretech and Insurance Awareness to widen customer reach. The Regulation allows an insurer an additional allowance towards Insuretech and Insurance Awareness expenses to the extent of 5% of the allowable expenses of management. Generally, when the insurance companies embark on cost cutting by adopting austerity measures, the budget towards technology used to be the early victim. By allowing the Insuretech expenses in addition, clearly the emphasis is laid on the importance of technology for higher penetration and business growth. It is a shot in the arm for Insuretech companies, who should be more aggressive in collaborating with insurance companies in product innovation, better distribution and customer satisfaction. This concession by the Regulator is definitely a much needed fillip to the technological innovations and provides an impetus to the Insuretech companies.

The market has become more dynamic. The expectations of policyholders are ever increasing. The boilerplate wordings should replace specific, customer centric and tailor-made contracts with clarity and simplicity. The coverage, add-on covers, exclusions and conditions should be transparent. While homogenous risks can be priced and worded uniformly, the commercial risks should capture large volume of data to assess and price them. The Insuretech can play a large role in helping the insurers.

Needless to say, with ChatGPT from MS, Bard AI from Google the technology companies face a stiff challenge in the future and the Insuretech companies are no exception to this. They also need to pull up their socks and should have a knowledgeable pool of domain persons and developers.