KATHMANDU, July 18: The Insurance Board, the insurance sector regulator, has put a cap on insurance companies´ expenditure on certain sectors to control their extravagant habit and end unhealthy competition in the market, providing them room to improve their profitability.
As per the latest directive, life insurance companies on can now spend only up to six percent of annual gross premium income generated through sales of new policies on guest entertainment, business promotion, advertisement and agent incentives.
Likewise, non-life insurance companies can only spend up to 1.5 percent of annual net premium income on these activities per year.
“We came up with the measures as we found insurance companies were spending generously on activities like guest entertainment, business promotion, advertisement and agent incentives,” Binod Ayral, executive director of the Insurance Board, told Republica.
This, according to the Board, is expected to control unhealthy competition in the market like paying exorbitant sums to agents who sell insurance policies, while on the other increase profitability of insurance companies by around 10-15 percent per year.
The Insurance Regulation 1993 states that insurance companies may spend up to 30 percent of gross premium income as management expenses. Apart from this, life insurance companies can extend commission of up to 25 percent of premium income as commission to agents for the first two years and five percent thereafter. But in the case of non-life insurance companies, commission amount are specified by the Insurance Board.
On top of this, insurance companies are also allowed to provide incentive bonus to insurance agents, ceiling on which has not been fixed. And most of the insurance companies use this legal loophole to dole out excessive amount to insurance agents.
On example of this was the illegal pyramid business conducted by now-banned Momento Universal, a corporate agent of National Life Insurance Company, which was promising income of up to Rs 60,000 per month to everyone who sold policies of the insurer.
“We want to discourage such practices through the directive,” an Insurance Board official told Republica.
Data compiled by the Board shows that life insurance companies had spent 27.15 percent of gross premium income of Rs 2.34 billion generated through sales of new policies on activities like guest entertainment, business promotion, advertisement and agent incentives in the fiscal year 2010/11. Of this, Rs 529.34 million alone was spent on agent incentive, which is 22.57 percent of the gross premium income generated through sales of new policies. This amount was on top of commission of up to 25 percent of premium income given to them.
In the case of non-life insurance companies, it was found that over two percent of annual net premium income of Rs 3.36 billion was spent on activities like guest entertainment, business promotion, advertisement and agent incentives in the fiscal year 2010/11. Although expenses of these insurers on agent incentive stood at Rs 287,484 during the year, they had spent Rs 41.89 million on business promotion.
“This gave us room to suspect that non-life insurers included incentives doled out to agents under the heading of business promotion,” an Insurance Board official said, expressing hope the new directive would help control these activities.