Health Insurers Fight IRDAI’s 20% Expense Cap on Mandatory Policies

MUMBAI: Standalone health insurers are pushing back against new regulatory proposals. They have formally asked the Insurance Regulatory and Development Authority of India (IRDAI) to change how expense limits are calculated. The core issue revolves around mandatory insurance products. These include motor third-party covers, crop insurance, and state-sponsored health schemes.

Industry leaders argue these mandatory policies run on entirely different economics compared to retail health insurance. They want these bulk products removed from the calculation base that determines a company's Expenses of Management (EoM). If left unchanged, pure health insurers fear they will face an unfair disadvantage under the new common regulatory framework.

The 20% Target: Numbers Behind the Regulatory Move

The Indian insurance sector is currently facing its most significant structural overhaul in years. In late September 2026, IRDAI released a detailed consultation paper. The primary goal is to tightly control how much insurers spend on distributing and managing their products. These operating costs are known in the industry as Expenses of Management, or simply EoM.

Currently, standalone health insurers operate under an EoM ceiling of 35% of their Gross Written Premium (GWP). Meanwhile, general insurers, who sell a wider variety of non-life products, have a slightly tighter 30% limit. The new proposal drastically changes this basic math. IRDAI wants to bring all non-life players under a single, unified framework.

The regulator's new glide path is highly aggressive. It mandates that EoM limits must fall to 25% within two years and strictly to 20% within five years. Furthermore, the calculation base will shift from Gross Written Premium (GWP) to domestic Gross Direct Premium Income (GDPI). This shift removes inward reinsurance from the math, making the base even narrower and harder to leverage.

For standalone health companies, hitting this 20% mark will be incredibly difficult. Retail health insurance is a highly physical, consumer-facing product. It requires heavy marketing, medical underwriting, agent training, and direct sales efforts. These activities naturally push operational costs higher. Finding cost efficiency is tough. Similar structural challenges are seen when scaling secured financial products in emerging retail markets.

Regulatory & Operational Mechanics: Why Mandatory Covers Skew the Math

To understand the industry's strong pushback, one must look closely at how different insurance products are sold today. Mandatory insurance products virtually sell themselves. For instance, the law requires every vehicle owner to have motor third-party insurance to drive on Indian roads.

Similarly, farmers often receive crop insurance directly tied to their state agricultural loans. The government also heavily subsidizes massive public health schemes. Because these products are mandatory or state-backed, they require almost zero marketing effort. Insurers pay minimal, if any, distribution commissions on them. Yet, these policies generate massive premium volumes on the balance sheet.

When a general insurer calculates its total EoM ratio, these huge, low-cost premiums act as a massive denominator. This mathematically lowers their overall expense percentage. It makes them look highly efficient on paper. Standalone health insurers simply do not have this luxury. They focus almost entirely on individual retail health policies. Every single policy must be actively sold and explained to a human consumer.

According to a recent report by The Economic Times, Nilesh Kambli, Chief Financial Officer of Star Health Insurance, highlighted this exact operational mismatch in the industry feedback submitted to IRDAI.

"Premiums from mandatory insurance businesses should be excluded when calculating the proposed 25% expense limit, as such products often do not involve intermediary distribution commissions." — Nilesh Kambli, CFO, Star Health (via Economic Times)

Kambli's argument is rooted in simple, practical math. If IRDAI applies a flat 25% rule across the board, general insurers will easily pass the test using their motor and crop portfolios. Meanwhile, standalone health insurers will be forced to slash vital operational spending just to comply. This could deeply harm their ability to service complex medical claims efficiently or expand their presence into rural areas.

This kind of rigid regulatory standardization is sweeping the broader financial sector. We see similar intense regulatory scrutiny affecting leadership teams across the BFSI space, leading to major changes like recent executive shifts at top small finance banks. When rules change drastically, traditional business models must quickly pivot to survive.

Commission Caps: Changing the Economics of Distribution

The proposed EoM limits are only half the story. The IRDAI consultation paper also targets the exact commissions paid out to agents and brokers. For years, distribution entities have enjoyed flexible, often lucrative payouts. The regulator now wants to rein this in to protect policyholders from hidden distribution costs and aggressive mis-selling tactics.

The proposed commission structure is remarkably strict. For individual health insurance policies, distribution entities (like large corporate brokers) will see their first-year commission capped at roughly 15%. Individual agents will be capped at slightly more, around 20%. More importantly, the renewal commissions are slated for deep cuts. Entities will only get 5% on renewals, while individual agents will receive just 10%.

This is a massive shift for the workforce. Health insurance is a long-term, sticky product. Agents rely heavily on compounding renewal income to sustain their local businesses. By slashing renewal payouts, IRDAI hopes to force agents to acquire new customers constantly. This could theoretically deepen insurance penetration across the country. However, industry insiders worry this might demoralize the current workforce and drive talent away.

To offset these tighter financial margins, insurers will need to heavily digitize their distribution networks. Upgrading mobile apps, launching self-serve portals, and integrating smarter underwriting tools will become critical for survival. This massive push for scalable technology mirrors how consumer tech firms are evolving, such as PhonePe expanding its AppStore to capture digital goods markets efficiently without high human overhead.

The News4Bharat Perspective: Will Policyholders Truly Benefit?

From a strict consumer viewpoint, IRDAI's core intentions are incredibly noble. High expense ratios mean that a large chunk of a customer's hard-earned premium goes toward administrative overhead, fancy offices, and agent bonuses. It does not go toward actual medical claims. By forcing total expenses down, IRDAI wants to make health insurance cheaper and much more transparent for the common citizen.

However, the actual transition will be painful and risky. If standalone health insurers are forced to cut their operational budgets too quickly, customer service could severely suffer. Claim processing times might slow down significantly if companies freeze their hiring. Furthermore, if field agents earn much less money on annual renewals, they might offer less on-ground support to elderly policyholders trying to navigate complex hospital bills.

Technology will likely have to fill this looming service gap. The industry is rapidly adopting advanced software systems to handle routine customer queries and detect fraudulent hospital claims. As experts have noted regarding AI in banking, automation can drastically reduce operational costs without sacrificing accuracy.

Yet, technology also introduces entirely new risks. As digital networks grow and handle more sensitive health data, companies must spend heavily on cybersecurity. They must prevent incidents like AI-driven cyber fraud, adding another heavy layer of tech expense that IRDAI's strict new limits may struggle to accommodate.

What to Watch Next: The Extended October 31 Deadline

The regulatory clock is currently ticking very fast. IRDAI initially invited comments on the draft guidelines until late October. They eventually extended the feedback deadline to October 31, 2026. The regulator did this after seeing a massive influx of detailed feedback and deep concerns from across the entire BFSI spectrum.

According to official regulatory frameworks, IRDAI Chairman Ajay Seth has publicly stated that the regulator is open to stakeholder dialogue. The phased five-year approach was designed exactly for this reason. It aims to give insurers enough time to adjust their core business models without causing sudden market shocks.

The critical question now is whether the regulator will grant the specific carve-outs requested by the standalone health sector. If IRDAI agrees to completely exclude mandatory premiums like crop and motor third-party from the calculation base, it will level the playing field.

If the regulator refuses and enforces a flat rule, standalone health insurers will face a highly stressful two years of aggressive, mandatory cost-cutting. Final rules are expected to be officially notified in the coming winter months. These final rules will dictate the industry's strategic direction and profitability for the next decade.

Frequently Asked Questions (FAQs)

Clear, plain-English answers to the most pressing questions surrounding the IRDAI expense management proposals.

What does Expense of Management (EoM) mean?

EoM refers to the total operating costs an insurance company spends to run its business. This includes agent commissions, advertising, employee salaries, and tech costs, calculated as a percentage of their total premium income.

Why do standalone health insurers want a rule change?

They argue that general insurers sell mandatory products (like car insurance) that cost nothing to distribute. This artificially lowers their average expense ratio, giving them an unfair mathematical advantage over pure health insurers.

Will these new IRDAI rules lower my health insurance premium?

The regulator's goal is to drastically reduce distribution costs and agent commissions. In theory, insurers should pass these operational savings on to consumers in the form of lower, or at least stable, policy premiums over time.

What are the proposed caps on agent commissions?

The draft proposes capping first-year commissions at 20% for individual agents and 15% for corporate entities. Renewal commissions will drop significantly to 10% for agents and just 5% for distribution entities.