IRDAI 2024 Expenses of Management and Commission Master Circular: How Insurer Cost Caps Shape Your Premium

Every rupee of premium you hand an insurer is split before a single claim is ever paid. Part of it funds the risk you are buying; part of it pays for the machinery that sells and services the policy - salaries, office costs, advertising and, above all, the commission paid to the agent or broker who signed you up. The rulebook that governs how much of your money an insurer may spend on that machinery is the Master Circular on Expenses of Management, including Commission, of Insurers, 2024, carrying reference IRDAI/F&I/CIR/79/5/2024.

That circular is not a standalone instruction. It operationalises the IRDAI (Expenses of Management, including Commission, of Insurers) Regulations, 2024, and both are issued under Section 34 of the Insurance Act 1938 and Section 14 of the IRDA Act 1999. If you have ever wondered why two near-identical term plans can quote very different premiums, the expenses-of-management (EoM) framework is a large part of the answer. This explainer walks through what the 2024 circular actually requires, why it reaches into your premium, and where the traps still sit.

The Rule / Product

"Expenses of management" is the regulator's umbrella term for everything an insurer spends running its business other than the claims and benefits it pays out. Under the 2024 framework it captures operating expenses, commission and remuneration to intermediaries, and the various distribution-related payments an insurer makes. The Master Circular IRDAI/F&I/CIR/79/5/2024 is the detailed how-to that sits under Regulation 23 of the 2024 EoM Regulations, telling insurers how to compute, allocate and report those expenses.

The single most important design choice in the 2024 regime is that it moves the industry away from rigid, product-by-product commission ceilings towards an overall EoM-linked limit. Instead of the regulator dictating "this product may pay no more than X% commission", an insurer is now expected to manage all its distribution and operating costs within one aggregate expenses envelope. That shift began with the Payment of Commission Regulations of 2023 and was consolidated into the combined EoM-and-commission Regulations of 2024, so that a single rulebook now covers both operating expenses and commission.

To stop that flexibility becoming a free-for-all, the circular hard-wires governance. Every insurer must have a Board-approved policy on its commission structure - the Board, not the sales team, owns the decision on how much distributors are paid and on what basis. The 2024 circular also builds in the concept of returns on commission payments by insurers, meaning commission that has been paid can be recovered or adjusted in defined circumstances rather than being treated as gone the moment a policy is sold. Both requirements flow from the same statutory backbone: Section 34 of the Insurance Act 1938 gives IRDAI the power to issue such directions, and Section 14 of the IRDA Act 1999 gives it the mandate to regulate insurer conduct.

The framework distinguishes clearly between the different classes of business. Life insurers, general insurers and standalone health insurers each run on their own EoM computation, because the economics of a 30-year endowment policy and a one-year motor cover are not comparable. What is common across all of them is the reporting discipline: an insurer must be able to demonstrate to IRDAI that its total spend on management and commission fits inside its allowable envelope, class by class, and must submit that computation as part of its regulatory filings.

The 2024 circular also links the expense discipline to the wider consumer rulebook. It sits alongside the IRDAI (Protection of Policyholders' Interests, Operations and Allied Matters) Regulations, 2024, so that the money an insurer is allowed to spend on distribution is read together with its obligations on disclosure, servicing and grievance handling. In practice that means the same 2024 reform wave that reshaped commission also tightened what an insurer must tell you before and after the sale - two halves of the same policyholder-first design.

Why It Matters

The EoM envelope matters to you because it is funded entirely out of premiums. There is no separate pot of money for an insurer's marketing budget - every commission cheque and every advertisement is ultimately paid from the aggregate premium the company collects in a year. An insurer that runs a tighter expense ratio has more headroom to price competitively or to strengthen the benefits it offers, which is exactly why the expense ratio is one of the numbers worth checking before you buy.

For pure-protection buyers the effect is most visible in term insurance. A term plan has no investment component, so almost the entire premium is either risk cost or expense. When you compare quotes on a term insurance premium calculator, a chunk of the gap between two insurers reflects how efficiently each one distributes and administers the product under its EoM budget. The 2024 circular's push towards overall-limit discipline is designed, over time, to reward the leaner operator.

For savings-linked products the stakes are higher still, because expenses compound against your returns for decades. A unit-linked plan discloses its charges explicitly, and you can see how those charges drag on a fund by running the maths through a ULIP versus mutual fund calculator. Traditional endowment and money-back plans bury the same costs inside a lower bonus or a lower surrender value, which is why the regulator's insistence on Board-owned commission policy is a consumer-protection measure and not just a paperwork exercise.

Finally, the framework matters because it changes the incentive to churn. Under a pure product-wise cap, front-loaded commission encouraged some distributors to sell and re-sell. By putting the whole cost base under one envelope and adding the "returns on commission" mechanism in the 2024 circular, IRDAI has tied distributor reward more closely to whether a policy actually stays on the books - a direct nod to policyholder interest that echoes the 2024 Protection of Policyholders' Interests regime.

The table below sets out what the EoM envelope does and does not cover.

Worked Numbers

To see how the envelope shapes a premium, take a single illustrative term-plan premium and split it into its jobs. The figures below are illustrative arithmetic chosen to show the mechanics - they are not regulatory ceilings, and the actual proportions differ by insurer, product and age.

Suppose you pay an annual premium of Rs 50,000 for a term policy. Conceptually every insurer must fit the non-risk part of that premium inside its EoM budget. The split might look like this:

Read the table as a demonstration of one identity, not as a claim about any real product: Premium = Risk cost + Expenses (commission plus operating) + Margin. In this illustration Rs 12,500 of the Rs 50,000 - the commission plus operating lines - is the part the EoM framework governs. If a leaner insurer could deliver the same cover while spending Rs 9,500 rather than Rs 12,500 on management, it could either quote a lower premium or route the Rs 3,000 difference into stronger reserves, and the EoM discipline is what makes that trade-off visible to the regulator.

The same logic scales up. If that insurer writes Rs 1,000 crore of premium in a year, the difference between a 25% aggregate expense load and a 19% one is Rs 60 crore of policyholder money either spent on running the business or retained for benefits and pricing. That is the level at which IRDAI's aggregate-limit approach bites: it is checked on the whole book, class by class, not policy by policy. For health cover, you can pressure-test how much of your premium buys real protection - after loadings and expenses - using a health insurance premium calculator before you commit.

Pitfalls

The 2024 EoM circular disciplines what an insurer spends, but it does not rewrite the fine print that decides what you actually get paid. The traps below survive the reform, and every one of them is a policy-wording issue you must read for yourself.

Room-rent capping. Many indemnity health policies limit the room category or cap the daily room charge, and because hospitals often price the entire bill around the room class, a room-rent capping clause can proportionately shrink every associated charge, not just the room. A policy that reimburses only 1% of sum assured per day of room rent can leave you paying a large slice of a Rs 5 lakh hospitalisation.

Sub-limits. A sub-limit fixes a rupee ceiling on a specific treatment - cataract, knee replacement, or a defined disease - regardless of your overall sum insured. A Rs 10 lakh policy with a Rs 40,000 cataract sub-limit will still pay only Rs 40,000 for that surgery.

Co-payment. A co-payment clause makes you bear a fixed percentage of every admissible claim. A 20% co-pay on a Rs 4 lakh claim means Rs 80,000 comes out of your pocket even when the claim is fully approved.

Pre-existing disease waiting periods. A pre-existing disease is typically excluded for a defined waiting period from the policy start date. Buying young shortens the practical impact of that clause, because the waiting period runs out long before most age-related conditions appear.

Surrender-value shock on savings plans. Traditional and unit-linked plans can return far less than you have paid if you exit early, so check the surrender value schedule before you sign, not after. This is where opaque expense loading does the most damage to a policyholder.

Missing the free-look window. If a policy was mis-sold - the commission incentive that the EoM framework tries to govern does not disappear at the point of sale - your first remedy is the free-look period, the short window after issuance in which you can return the policy for a refund net of limited deductions. Once that window closes, exiting a savings plan usually means accepting the surrender-value haircut described above, so read the document the day it arrives rather than filing it away.

FAQ

What is the reference number of the IRDAI EoM and commission Master Circular?

It is the Master Circular on Expenses of Management, including Commission, of Insurers, 2024, reference IRDAI/F&I/CIR/79/5/2024, issued under Section 34 of the Insurance Act 1938 and Section 14 of the IRDA Act 1999.

Did the 2024 circular abolish commission caps?

It moved the industry away from rigid product-wise commission ceilings towards an overall EoM-linked limit. Insurers now manage commission within one aggregate expenses envelope rather than against a fixed per-product percentage, subject to a Board-approved commission policy under the 2024 regime.

Who decides how much commission an insurer pays?

The insurer's Board. The circular requires a Board-approved policy on commission structure, so the decision sits with the governing body and must be documented and defensible to IRDAI, not left to individual sales teams.

Does a lower expense ratio mean a better policy for me?

Not on its own, but it is a strong signal. Because the entire EoM budget is funded from premium, an insurer that runs leaner has more room to price competitively or strengthen benefits. Always read it alongside the claim experience and the actual policy wording.

Does the EoM framework affect the claim I receive?

No. Claims and policy benefits sit outside the EoM envelope. The framework governs commission and operating spend; what you are paid on a claim is decided by the sum assured, the policy terms, and any sub-limits, co-pay or room-rent conditions in your contract.

How can I see the impact of expenses on my own premium?

Run comparable quotes through a premium calculator. For pure cover, a term insurance premium calculator isolates risk from expense; for savings-linked plans, a ULIP versus mutual fund calculator shows how charges compound against returns over the years.

Where can I read the primary source?

The circular and the parent IRDAI (Expenses of Management, including Commission, of Insurers) Regulations, 2024 are published on the regulator's website at irdai.gov.in, and the enabling statutes - the Insurance Act 1938 and the IRDA Act 1999 - are available on indiacode.nic.in.