The norm: Cap on expenses at 22% of overall expenses after 5 years of operations. Following a diktat from the Insurance Regulatory & Development Authority (Irda), life insurance companies are looking to put brakes on their management expenses.

Insurers such as ING Life, Metlife, Max New York Life and Aviva Life Insurance were asked by the sector regulator to lower their management expenses which include operating expenses, business acquisition cost, and expenses on marketing and advertising. Under the norms, life insurers have to cap management expenses at 22 per cent of their overall expenses after five years of operations.

"We had asked four life insurance companies to explain why their expense ratio exceeded the prescribed norms and gave them time till March 2010 to bring down expenses," said R Kannan, member (life), Irda. In 2006, insurers had sought a three-year extension to comply with the norms. Earlier in the current financial year, when companies asked for another extension, the regulator decided to consider extending the timeline for compliance on a case-to-case basis.

Aviva Life had also approached the regulator for an extension. "We had approached the regulator and we have got an extension till March 2010 to bring down our expenses. Next financial year, we will be below the prescribed threshold," said TR Ramachandran, managing director & chief executive officer, Aviva Life. Market experts say that higher expense ratio would result into delay in break-even. "Company's valuation and break-even are dependent on the way they manage their expenses. Higher expenses may push break-even further and lower valuations," said E&Y Partner Ashwin Parekh.

Most companies have started focusing on consolidation after entering the eighth year of operation. Some have rolled back their expansion plans and others have closed some offices. Drop in new sales have acted as a boon in disguise for insurers. Insurance companies have to put aside extra capital for every single policy they underwrite. Solvency requirement for unit-linked insurance plans (Ulips) is one per cent of sum at risk and, for traditional products, it is 1.8 per cent of sum at risk. Private players sell more Ulips requiring lower solvency. Slowdown in sales of policies has forced insurers to increase productivity and bring down distribution and unproductive sales force. In addition, insurers have focused on improving renewal premium collection. In case of renewal premium, insurers neither have to make additional capital nor shell out acquisition cost.

Aviva Life has brought down losses from 36 per cent at the end of December 2008 to 29 per cent at the end of December 2009. Reliance Life has brought down the management expense ratio from 44 per cent last year to 29.8 per cent at the end of December 2009. "We have taken various cost-cutting measures and focused on a proper product-mix. Over 100 per cent jump in renewal premium has also helped us reduce our expenses," said Malay Ghosh, MD & CEO, Reliance Life.

The industry average of management expense is around 28 per cent. The largest life insurer, SBI Life, has brought down management expenses to 14.5 per cent from 17-18 per cent during the last financial year. Bajaj Allianz has brought down the expense ratio marginally from 19.6 per cent to 18.5 per cent. Similarly, Birla Sun Life's management expense is at 25 per cent from 29 per cent in the last financial year.

As a result of high expenses, insurance companies have accumulated huge losses. During the third quarter of the financial year, top five insurance companies have brought down their losses and most of them did not require any capital infusion. The other way that insurance companies have adopted to check their losses are cutting down the agency force. For example, Kotak Life has reduced the agency force from 40,000 last year to 33,000 this year. Its management expense is 24 per cent. The company is looking at bringing it down to 18 per cent by the end of this financial year.