Facing steep expense cuts under proposed Irdai caps, insurers seek gentler glide path

Mumbai: Some of India’s largest insurers will need deep expense cuts to meet limits proposed by the insurance regulator, according to Mint’s calculations based on FY26 financial disclosures, prompting the industry to push for a phased glide path to meet the tighter caps.

Meeting the FY29 ceilings could require cuts of up to 13.6 percentage points for general insurers and up to 10.9 percentage points for life insurers, with FY32 targets requiring further reductions. The calculation analyzed the top five companies by market share across both general and life categories.

In a consultation paper on distribution reforms released in September, the Insurance Regulatory and Development Authority of India (Irdai) proposed that general insurers reduce their expenses of management (EoM) — the money spent on commissions to agents and other distributors plus the cost of running the business — to 25% of premium in two years and 20% in five years, starting in FY28. Irdai has sought comments on the paper by 25 October.

For life insurers, the limits would be set at 15% by FY29 and 12.5% by FY32. However, insurers operating below these benchmarks in FY25 will likely be held to tighter targets over five years: ideally below 10% for life insurers and 20% for general insurers, according to the consultation paper.

New calculation method

Apart from stricter caps, Irdai has also proposed changes to the way EoM is calculated. The difference lies in what expenses are measured against. Currently, general insurers measure commissions and operating costs against gross written premium, which includes income from assuming reinsurance. Under the proposed rules, the base will strictly be premium earned from policies sold directly in India.

Additionally, crop insurance premiums would only count at one-third of their value, addressing regulatory concerns that insurers underpriced these policies partly to satisfy current caps. Reinsurance commissions can no longer be offset against costs, while existing carve-outs for technology, awareness, and rural business will now fall within the cap. Because these allowances aren’t broken out in public filings, actual expense ratios may be slightly higher than Mint’s estimates.

For instance, ICICI Lombard’s EoM would rise to 32.4% from 29.8% under the current method, Bajaj General’s to 29.4% from 27.8%, Oriental Insurance’s to 27% from 25.7%, and New India Assurance’s to 23.3% from 21.2%. United India Insurance, already above the current 30% limit at 38.1%, would see its EoM rise to 38.6%. Among the top five players, only New India Assurance currently meets the proposed two-year target.

A spokesperson for Bajaj General confirmed the accuracy of the calculation, noting that its FY26 EoM stood at 29.4% including GST, and that it does not offset commissions earned on ceded reinsurance against expenses. The remaining insurers did not respond to Mint’s emailed queries.

“The calculations themselves are not the issue,” said Saurabh Bhalerao, director and head of BFSI research at CareEdge Group. The bigger concern, he said, is what they set off, including lower commissions, restructuring of distribution businesses, and the move to tighter limits. A smaller premium base “automatically reduces the amount an insurer can spend within the permitted limit”, he said.

Bhalerao said that evaluating an insurer using a single company-wide ratio could mask sharp variations across business lines. “Selling a fire policy is not the same as selling health insurance, and rural distribution is different from urban distribution,” he said. If the limits are enforced strictly, he expects some insurers to slow down and fix their costs before returning to growth, as they “cannot keep risking regulatory penalties”.

For life insurers, the current limit is built product by product from a premium split that is not published, so the existing ratio cannot be worked out from public data.

Under the proposed method, HDFC Life’s EoM stands at 21.2% and ICICI Prudential Life’s at 18.1%, requiring cuts of about 6 and 3 percentage points, respectively, to reach 15% in two years. LIC at 11.9% and SBI Life at 10.6% are already below that level, and Irdai’s data puts the two largest life insurers at 10-12%, which suggests they may be held to the stricter 10% goal.

Glide path

Insurers that breach the ceilings could face restrictions on launching new products and distributing dividends and, in extreme cases, curbs on new business through the channel responsible for the overrun.

In August, Irdai barred four insurers — Acko General Insurance, Niva Bupa Health Insurance, Pramerica Life Insurance and Edelweiss Life Insurance — from opening new branches for six months after finding lapses in following regulatory EoM limits in FY25.

Shubhra Goel, managing director at Alvarez & Marsal India, said even the larger insurers want a phased transition. “Implementation of this scale cannot happen overnight,” she said, “The industry will get there, but it needs a workable glide path.” Some mid-sized and smaller insurers lack the proprietary distribution channels the framework assumes, she said, and building them “is a hard call when expenses are high and premium growth is still catching up”.

An insurance executive said the company is engaging with the regulator on the glide path timeline, warning that satisfying the target ratios will prove challenging under the revised calculation base.

Amid talk of industry consolidation, Goel said investors remain committed to India, with some players evaluating whether parent companies must inject more capital. Meanwhile, Bhalerao pointed out that the cumulative burden of regulatory shifts “can consume management and sales bandwidth, potentially slowing growth”.