23rd India Fellowship Seminar
Management of expenses and Relevance of 17D
rules post Product Regulations 2013 (SA2)
Guide – Sunil Sharma
Presenters
Aparna Manoj Mhatre
Abhishek Verma
Kshitij Sharma
18 June 2015
Mumbai
Indian Actuarial Profession
Serving the Cause of Public Interest
Index
 Extant Regulation
 Product Regulation 2013 – Expense Controls
 Expense Analysis - Indian Life Insurance
Companies
 Expense Management
 Questions
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Extant Regulation
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Section 17-D of Insurance Rules 1939
 Defines allowable expenses of management in life-insurance business
(i) For Immediate/ deferred Single Premium Annuities:
5% of all premiums received during the year
(ii) For Immediate/ deferred Regular/ Limited Premium Paying Annuities:
10% of all first year's premiums; and
4% of all renewal premiums,
received during the year.
(iii) on other Single Premium policies
5% of all premiums received during the year
(iv) one-twentieth of 1% (i.e. 0.05%) of the average of the total sums assured for
reduced paid up policies (less reinsurances) at the beginning and end of the year.
(v) an amount computed on the basis of the percentages dependent on age of the
insurer's life-insurance business as specified in the table below:
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Section 17-D of Insurance Rules 1939
Duration of insurer's life insurance
Percentage of premiums (less re-Duration of insurer's
business
life insurance business insurances) received during the year other than
premiums referred to in items (i)
and (ii) above
in years
of first year's premiums
of renewal premiums
0-4
100
20
5-7
96.5
19
8-10
93
18
After the tenth year, if the insurer's business in force-(a)
is less than two crores of Rupees
90
18
is less than five crores of rupees but not less than two
crores of rupees
90
17
(c) is less than ten crores of rupees but not less than five
crores of rupees
90
16
(d) is not less than ten crores of rupees
90
15
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Section 40 B of Insurance Act, 1938
•
Limitation of expenses of management in life insurance business—
 1. Every life insurance company in India has to furnish, statements in the prescribed form certified
by an actuary on the basis of premiums currently used by him in regard to new business in respect
of mortality, rate of interest, expenses and bonus loading, to the IRDA
 2. After the 31st day of December, 1950, no insurer shall, in respect of life insurance business
transacted by him in India, spend as expenses of management in any calendar year an amount in
excess of the prescribed limits and in prescribing any such limits regard shall be had to the size and
age of the insurer and the provision generally made for expenses of management in the premium
rates of insurers:
 Provided that where an insurer has spent such expenses in any year an amount in excess of the
amount permissible under this sub-section, he shall not be deemed to have contravened the
provisions of this section, if the excess amount so spent is within such limits as may be fixed in
respect of the year by the Authority after consultation with the Executive Committee of the Life
Insurance Council constituted under section 64F, by which, the actual expenses incurred may exceed
the expenses permissible under this sub-section.
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Section 40 B of Insurance Act, 1938
 3. In respect of any statement mentioned in sub-section (1), the Authority may
require that it shall be submitted to another actuary appointed by the insurer for
the purpose and approved by the Authority, for certification by him/ her, whether
with or without modifications.
 Every insurer transacting life insurance business in India shall incorporate in the
revenue account—
•
(a) a certificate signed by the chairman and two directors and by the principal
officer of the insurer, and an auditor’s certificate, certifying that all expenses of
management in respect of life insurance business transacted by the insurer in India
have been fully debited in the revenue account as expenses, and
•
(b) if the insurer is carrying on any other class of insurance business in addition to
life insurance business an auditor’s certificate certifying that all charges incurred in
respect of his life insurance business and in respect of his business other than life
insurance business have been fully debited in the respective revenue accounts.
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Recent Revisions
• Impact of new Insurance Act
• Discussion paper issued by IRDA
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Product Regulation 2013 - Expense Controls
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Product Regulation 2013: Commission cap
For both Linked and Non-linked products:
• Commission charged to the customer capped:
• Separate limits for individual and group business
• For example, for all distribution channels except Direct marketing:
Other than pension Products
 2% of the single premium policy
 For regular premium policy, cap as per table below:
Premium Paying
Maximum Commission If any form as % of premium
Terms
1st year
2 & 3 Year
Subsequent Years
5
15
7.5/5(*)
5
6
18
7.5/5(*)
5
7
21
7.5/5(*)
5
8
24
7.5/5(*)
5
9
27
7.5/5(*)
5
10
30
7.5/5(*)
5
11
33/30(*)
7.5/5(*)
5
>= 12
35/30(*)
7.5/5(*)
5
(*) The maximum commission
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Product Regulation 2013: Commission cap
Pension Products
 2% of the single premium policy
 7.5% of the first year's premium 2% of each renewal premium.
• If commission significantly different between distribution channels:
 Appointed actuary to justify the difference
 Justify how the difference is allowed in pricing
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Product Regulation 2013: Discontinuance charge
For Linked Products, obligation to recoup expenses
associated only with discontinuance:
Reflect actual expenses
incurred
Within Statutory ceilings of
commission and expenses
Do not exceed limits
specified
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Product Regulation 2013: Discontinuance charge
For example, the discontinuance charge levied on regular
premium policies follow below limits:
Policy year of
Discontinuance
Max Discontinuance
Charges where
annualized premium up to
Rs.25,000/-
Max Discontinuance
Charges where
annualized premium above
Rs.25,000/-
1
Lower of 20% * ( AP or FV/policy account
value) subject to a max of Rs3000
Lower of 6% * ( AP or FV/policy account
value) subject to a max of Rs6000
2
Lower of 15% * ( AP or FV/policy account
value) subject to a max of Rs2000
Lower of 4% * ( AP or FV/policy account
value) subject to a max of Rs5000
3
Lower of 10% * ( AP or FV/policy account
value) subject to a max of Rs1500
Lower of 3% * ( AP or FV/policy account
value) subject to a max of Rs4000
4
Lower of 5% * ( AP or FV/policy account
value) subject to a max of Rs1000
Lower of 2% * ( AP or FV/policy account
value) subject to a max of Rs2000
>=5
Nil
Nil
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Other Controls
Charging Caps
•
•
•
•
Surrender charge cap on the fund based group products
For linked products, cap on the fund management charge of 135bps
For linked products, cap on the guarantee charge of 50bps
For linked products, charges can fluctuate between min. and max. but
cannot vary more than 1.5 times during the first 5 years
Indirect Controls
• For non linked participating products, Constitution of with profits
committee(WPC)
 WPC to sign-off expenses allocated to the participating fund and in the asset share
calculation
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Expense Analysis – FY 2014-15
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Expense Ratios
Expense of Management to Gross Direct Premium Ratio
110.0%
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
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Commission Ratios – Line of Business
Commission Ratio
20.0%
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
HDFC Life
ICICI Prudential
Max Life
Total
Birla SunLife
Participating
IDBI Federal
Non-Participating
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Linked
DHFL Pramerica
SUD Life
Edelweiss Tokio
Group
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Opex Ratios
Opex Ratio
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
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Opex Ratios – Line of Business
Opex Ratio - Line of Business
140.0%
130.0%
120.0%
110.0%
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
HDFC Life
ICICI Prudential
Max Life
Total
Birla SunLife
Participating
IDBI Federal
Non-Participating
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Canara HSBC
Linked
DHFL Pramerica
SUD Life
Edelweiss Tokio
Group
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Portfolio Turnover
First Year Premium to Total Premium Ratio
110.0%
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
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Agency Channel
Opex Ratio Vs Agency Commission Proportion
60.0%
Aegon Religare
50.0%
DHFL Pramerica
40.0%
Future Generali
Reliance Life
30.0%
Tata AIA
SUD Life
IDBI Federal
Exide Life
PNB MetLife
Kotak Life
20.0%
Max Life
Birla Sunlife
Canara HSBC
10.0%
ICICI Prudential
India First
SBI Life
HDFC Life
0.0%
0%
10%
20%
30%
40%
50%
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60%
70%
80%
90%
100%
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Key Dependencies
• Business volume
– Single premium can distort the picture
• Persistency
• Business mix
– Significant impact on commissions payable
– Group business more expense efficient?
• Distribution Channel
– Bancassurance generally more expense efficient
– New channels (e.g. Online sales, common centers)
– Improvement in agent productivity critical
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Expense Management
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Business growth
Insurer maintains
excess capacity
Higher portfolio
turnover requires
constant endeavors to
grow
Below
Expectation
business
growth
Relationship selling
can result in poor
persistency
Force utilization of
inefficient
distribution channels
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Other factors
Expense inflation
Focus on top-line
growth
Cost of regulation /
compliance
Increasing
cost base
Uncoordinated
decision making
Expense inflation
Sufficient / relevant
information
unavailable for
monitoring
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Any Questions?
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