Mumbai: The insurance industry is considering seeking a tiered expense structure, modelled on the mutual fund industry, as an alternative to the uniform expense limits proposed by the sector regulator, people familiar with the discussions said.

Under the proposal being discussed, smaller insurers want to be allowed a higher EoM (expenses of management) limit on their initial premium base, with the permitted expense ratio declining progressively as the insurer grows. The idea is to give new and smaller players greater room to invest in distribution, technology and products while preventing higher expenses from continuing indefinitely as the business scales, they said.

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For instance, some midsize companies are discussing a model that would allow an insurer to incur a higher percentage of expenses on its first tranche of premium and progressively lower the limit as premium crosses specified thresholds. Suggestions on the thresholds and percentages are still being discussed within the industry.

Insurers started these discussions after the Insurance Regulatory and Development Authority of India proposed to limit the EoM ratio, or the share of premiums that insurers can spend on running the business, including for paying commissions.

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Step by Step

Under the regulator's proposal, life insurers need to bring their EoM to 15% of gross direct premium within two years and 12.5% in five years. Insurers that were already below the proposed benchmark would eventually have to bring their EoM down to 10%. General insurers need to bring it within 25% in two years and 20% in five years.

Industry executives argue that a uniform EoM ceiling could disproportionately affect smaller or newer insurers that do not have the scale of established players to spread technology, distribution and other fixed costs.

According to them, regulations allowing a tiered cost structure in the mutual fund industry helped smaller asset managers to compete with the larger ones. Under the tiered expense structure for mutual funds, the permitted expense ratio decreases as the scheme's assets grow.

The insurance industry is proposing that the total premium be used as a proxy for scale rather than assets under management.

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This structure could allow smaller insurers to build scale without immediately being forced to operate at the same cost ratio as much larger players. "This could encourage competition and prevent the market from becoming concentrated among a few large insurers," one executive said.

Insurers are discussing this as part of the consultation process. The regulator has asked insurers to submit feedback by October 25. The exact premium thresholds and EoM will be finalised after taking industry feedback.