How IRDAI Governs Insurer Overheads: The 2024 Master Circular on Expenses of Management and Commission

On 15 May 2024, the Insurance Regulatory and Development Authority of India (IRDAI) issued the Master Circular on Expenses of Management, including Commission, of Insurers, 2024 (Ref IRDAI/F&I/CIR/79/5/2024). It operationalises the IRDAI (Expenses of Management, including Commission, of Insurers) Regulations, 2024, which were notified on 23 January 2024 and came into force from 1 April 2024. Together they replace three separate 2023 instruments and set a single, entity-level ceiling on what an insurer may spend to run its business. For policyholders, this is the rulebook that decides how much of your premium can legally be swallowed by salaries, rent, technology and agent commissions before it eats into the money set aside for claims.

The Rule / Product

The Expenses of Management (EoM) Regulations, 2024 were made under clauses (ic), (jd) and (je) of Section 114A(2), read with Sections 31B, 40, 40B and 40C of the Insurance Act, 1938, and Sections 14 and 26 of the IRDA Act, 1999. They apply to every insurer transacting life, general or health insurance business in India, and the Authority must review them at least once every three years under Regulation 1(4). The Regulations were signed by then IRDAI Chairperson Debasish Panda; the supplementing Master Circular was signed by Chief General Manager G R Surya Kumar.

Regulation 2(1)(f) defines "Expenses of Management" as three things added together: all operating expenses of the insurance business, commission paid to agents and intermediaries, and commission and expenses on reinsurance inward charged to the Revenue Account. It deliberately excludes "charges" such as income tax and Goods and Services Tax, which are levied against profits rather than against the premium pool. The stated objective in the Regulations is to give insurers flexibility to manage expenses "within the overall limits" so resources are used to enhance benefits to policyholders and to improve insurance penetration.

The headline ceilings sit in Part III. Under Regulation 6(1), a general insurer cannot incur EoM above 30 per cent of gross premium written in India in a financial year, and under Regulation 6(2) a standalone health insurer cannot exceed 35 per cent. Life insurers are governed by a segmental formula in Regulations 7 and 8, where the allowance is built up product line by product line rather than as one flat percentage. The expense ratio that results is what regulators and analysts watch each year.

The single most consequential change from the earlier regime is in Part V. Regulation 12 abolishes stand-alone, product-level commission caps. Instead, the total commission an insurer pays for its life, general or health products "shall not exceed the Expense of Management limits" set by these Regulations. In other words, commission is now just one line inside the overall EoM budget, and the IRDAI leaves the split between commission and other overheads to each insurer's board.

Why It Matters

The reform matters because for decades commissions were capped product by product, which pushed insurers to load costs into whichever heads were uncapped. By folding commission into a single EoM ceiling from 1 April 2024, the Regulations force a hard trade-off: an insurer that pays a richer commission on one product has less room for branch costs, advertising or technology elsewhere, because the 30 per cent (general) or 35 per cent (standalone health) wall does not move. This is designed to curb the mis-selling incentive that IRDAI flagged when it repealed the 2023 Payment of Commission Regulations under Regulation 24.

For the policyholder, the protection is in Regulations 19 and 20: where an insurer breaches its EoM limit, the excess "shall be charged to Profit & Loss Account". That single sentence means overspending is borne by shareholders, not recovered from the premium fund that pays your claims. For participating (with-profits) life policies, Regulation 20(1) applies the same discipline on an overall basis, protecting the bonus pool that belongs to policyholders.

Governance is the second lever. Regulation 3 requires every insurer to adopt a board-approved EoM policy each year that spells out cost-reduction measures and, critically, "the manner of transfer of benefits, arising from reduction of expenses" to policyholders by way of reduced premiums. Regulation 4 requires a separate board-approved commission policy. The Master Circular's Chapter I lists seven mandatory elements the commission policy must contain, including fairness, good distribution practice, and an audit-committee review at least once a year. If you are comparing two term plans on our term insurance premium calculator, the price gap partly reflects how each insurer has designed these board policies.

Accountability reaches individual executives through Regulation 21. If an insurer's actual EoM overshoots the projection in its Regulation 5 business plan by 10 per cent or more, no variable pay may be paid to the Managing Director, CEO, Whole-Time Directors or Key Management Persons for that financial year, and the Nomination and Remuneration Committee must enforce it. That provision does not apply where the duration of business is up to five years, giving new insurers room to build scale.

Worked Numbers

Consider a general insurer that writes Rs 10,000 crore of gross premium in India in a financial year. Under Regulation 6(1), its base EoM ceiling is 30 per cent, or Rs 3,000 crore. Regulation 10 then grants an extra allowance for insurtech and insurance-awareness spending of up to 5 per cent of that allowable figure, adding Rs 150 crore. Ignoring the rural and foreign-branch heads, the working ceiling is about Rs 3,150 crore.

Now suppose the insurer's actual operating expenses plus commission come to Rs 3,400 crore. The excess of Rs 250 crore (Rs 3,400 crore minus Rs 3,150 crore) must, under Regulation 19, be charged to the Profit & Loss Account and absorbed by shareholders. If Rs 3,400 crore is also 10 per cent or more above the EoM projected in the board-approved business plan, Regulation 21 zeroes out variable pay for the CEO and key executives that year.

Life insurers do not get a flat percentage; Regulation 8 assembles the ceiling from segment allowances. A regular-premium pure-risk (term) policy with a premium-paying term of 10 years or more attracts a first-year allowance of 100 per cent of first-year premium and 25 per cent of renewal premium under Regulation 8(11). Other life policies get 80 per cent in the first year and 17.5 per cent on renewals under Regulation 8(12). Where the premium-paying term is under 10 years, the first-year percentage is cut to 7.5 times the number of whole years, so an 8-year term brings the pure-risk first-year allowance down to 60 per cent (7.5 multiplied by 8).

Group fund-based business is treated differently again. Regulation 8(5) allows 1 per cent of the average Assets under Management up to Rs 10,000 crore and 0.80 per cent on any AUM above that, calculated on the opening and closing AUM for the year. Whether an insurer is quoting you a unit-linked plan or a traditional endowment, the price is disciplined by these ceilings; you can compare the long-run cost drag on our ULIP vs mutual fund calculator.

Two more allowances can lift the wall. Regulation 11(2) permits up to 15 per cent of the incremental premium over the previous year sourced from the rural sector and from named government schemes (PMSBY, PMJAY, PMFBY, PMJJBY and others notified by IRDAI), capped at the actual EoM spent on those heads in the prior year. Regulation 11(1) allows a general or health insurer an extra 10 per cent, and a life insurer 5 per cent, of gross premium written outside India through a foreign branch or an IFSC Insurance Office towards head-office costs.

Pitfalls

The first trap is assuming the ceiling protects a specific product's price. It does not. Because Regulation 12 pools all commission inside one EoM budget, an insurer can still pay a heavy first-year commission on a term or savings plan, provided its total EoM stays within 30 or 35 per cent (general or standalone health) or the Regulation 8 aggregate (life). The loading built into your premium is a business decision, not a regulatory maximum.

The second pitfall is the insurtech allowance. Under Regulation 10 the 5 per cent add-on is only for policyholder-oriented, technology-enabled innovation, and the Master Circular (Chapter III, paragraph 5) confirms it captures depreciation on insurtech capital expenditure. It cannot be stretched to cover ordinary advertising: Regulation 2(1)(h) expressly excludes insurance advertisements from the "insurance awareness" head. An insurer that mislabels routine marketing as awareness spending risks the auditor flagging a deviation.

The third trap sits in the certification. Under Regulation 13, the EoM return must be signed by the CEO, CFO, Chief Compliance Officer and Appointed Actuary, certified by the statutory auditor, reviewed by the Audit Committee, and filed with the Authority. The auditor certificate in the Master Circular's Annexure I and II requires an explicit statement that any excess has been charged to the Profit & Loss Account under Regulations 19 to 21, so an unresolved breach cannot be quietly netted against the premium fund.

The fourth pitfall is timing. Regulation 17 gave transitional forbearance only to insurers that had exceeded the limit for FY 2023-24, and only on a board undertaking to comply within two years, by the end of FY 2025-26. Under Regulations 15 and 16, ongoing case-by-case forbearance is confined to insurers whose duration of business is up to five years. An established insurer that overspends cannot expect indefinite grace.

The fifth trap is underestimating the consequences of repeated breach. Regulation 22 lets IRDAI charge the excess to the P&L, restrict new places of business, order a valuation, take penal action under Section 102 of the Insurance Act, restrict executive incentives, and even remove managerial personnel or appoint an administrator. Regulation 22(2) allows the Authority to bar new business in a segment on repeated breach, though existing policyholders must still be serviced. This is the same underwriting discipline that keeps an insurer's solvency buffer intact.

FAQ

What exactly counts as Expenses of Management under the 2024 Regulations?

Regulation 2(1)(f) defines EoM as the sum of all operating expenses of the insurance business, commission to agents and intermediaries, and commission and expenses on reinsurance inward charged to the Revenue Account. It excludes "charges" such as income tax and GST. Under the Master Circular (Chapter III), income and expenditure are counted on an accrual basis, and depreciation on insurtech capital expenditure is included in the insurtech allowance.

Have commission caps on individual products been removed?

Yes. Regulation 12 replaced product-level commission caps with a single rule: total commission for general, health or life products cannot exceed the overall EoM limits. From 1 April 2024, each insurer decides the commission split through its board-approved policy under Regulation 4, subject to the seven elements listed in Chapter I of the Master Circular, including an audit-committee review at least once a year.

What happens if an insurer spends more than the limit?

Under Regulations 19 and 20, the excess must be charged to the Profit & Loss Account, so shareholders absorb it rather than policyholders. Regulation 21 additionally denies variable pay to the MD, CEO, Whole-Time Directors and Key Management Persons if actual EoM exceeds the business-plan projection by 10 per cent or more, unless the insurer's duration of business is up to five years.

Do the same limits apply to life and general insurers?

No. Regulation 6 sets flat ceilings of 30 per cent of gross premium written for general insurers and 35 per cent for standalone health insurers. Life insurers follow Regulations 7 and 8, which build the ceiling from segment allowances, for example 100 per cent of first-year premium and 25 per cent of renewals on long-term pure-risk plans under Regulation 8(11).

Which extra allowances can raise the ceiling?

Regulation 10 adds up to 5 per cent of allowable EoM for combined insurtech and insurance-awareness spending. Regulation 11(2) adds up to 15 per cent of incremental premium from the rural sector and named schemes such as PMJJBY and PMFBY. Regulation 11(1) adds 10 per cent (general or health) or 5 per cent (life) of premium written abroad through a foreign branch or IFSC Insurance Office for head-office costs.

How often are these Regulations reviewed?

Regulation 1(4) requires a review at least once every three years from the date of notification on 23 January 2024, unless an earlier review, repeal or amendment is warranted. The Regulations came into force on 1 April 2024 and repealed the 2023 EoM Regulations for life and general or health insurers and the 2023 Payment of Commission Regulations under Regulation 24.

Where can I read the primary documents?

The Regulations and the 15 May 2024 Master Circular (Ref IRDAI/F&I/CIR/79/5/2024) are published on the IRDAI website at irdai.gov.in, and the enabling Sections 40, 40B and 40C of the Insurance Act, 1938 are available at indiacode.nic.in. Always rely on the gazetted text rather than secondary summaries when a claim depends on a specific percentage or date.