IRDAI Expenses of Management Cap Update for FY26 and FY27 in India: Revised Line-of-Business Slabs, Allowable Expense Definitions, and Broker Commission Treatment

The Expenses of Management framework for Indian insurers is governed by the IRDAI (Expenses of Management of Insurers transacting Life Insurance Business) Regulations, 2024 and the IRDAI (Expenses of Management of Insurers transacting General and Health Insurance Business) Regulations, 2024, which together replaced the earlier 2016 regulations. The 2024 regulations introduced a refreshed slab structure by line of business, redefined the categories of allowable expenses, and tightened the treatment of intermediary remuneration including broker commissions within the EoM envelope. The companion post on the 2024 EoM regulations impact covers the structural framework and the FY24 to FY25 transition; this article focuses on the anticipated update for the FY26 and FY27 cycle.

The 2024 regulations included transitional provisions and explicit periodic review by the regulator, with industry consultation through 2024 and 2025 informing the parameter calibrations for subsequent years. The expectation among finance and compliance leads at Indian insurers is that an updated circular setting the EoM slabs and definitions for FY26 and FY27 will be notified during 2026, with retrospective applicability from the start of FY26 for many provisions. Several elements of the update are already being signalled through regulatory communications, supervisory observations on FY25 EoM reporting, and industry working group discussions; other elements remain less certain.

The operational stake in the EoM framework is substantial. Indian non-life insurers reported management expenses in the range of 25 to 38 percent of net written premium in FY25 depending on the insurer and product mix, with the regulatory caps having driven material changes in distribution economics, technology spending, and overall operating model design through 2023 to 2025. For health insurers and standalone health insurers, the EoM ratios are typically higher reflecting the operational intensity of health claims handling. Life insurers operate under a distinct EoM structure with calibration to product types and policy durations. The 2026 update is expected to refine these patterns rather than reset them, but the refinements will be commercially material for individual insurers and for the broker community whose remuneration sits within the EoM envelope.

The 2024 EoM regulations introduced slab structures that vary by line of business, recognising the materially different operational economics across products. For non-life insurers, the slabs cover fire and engineering, motor own damage, motor third party, marine cargo and hull, liability lines, miscellaneous accident, retail health, and group health, with each category having a percentage cap on management expenses against net written premium. For life insurers, the slabs cover individual non-linked savings products, individual linked products, individual term insurance, individual pension, group savings, group term, and other defined categories, with the caps varying by policy duration and product structure.

The FY26 and FY27 update is expected to refine these slabs in several directions reflecting market experience and supervisory priorities.

1. Retail health expense ratios. The 2024 regulations set retail health EoM caps reflecting the operational intensity of health products including TPA management, claims processing, network management, and ongoing servicing. Industry experience through FY24 and FY25 has demonstrated that the actual operating costs for retail health, particularly for digital-first health insurers and for specialised health platforms, can exceed the current cap structures in certain combinations of product mix and policy mix. The expected calibration direction is a modest upward adjustment for specific retail health categories alongside tightened reporting requirements that ensure the higher cap is matched by transparency on the underlying cost drivers.

2. Commercial property and engineering. Fire and engineering lines have continued to operate in a hardening reinsurance environment with consequent pressure on the underwriting economics. The EoM caps for these lines are expected to be reviewed against the current reality of broker remuneration patterns, loss control survey costs, and underwriting capability investment. The expected direction is modest adjustment that recognises the higher cost structure of commercial lines while preserving the discipline objective of the framework.

3. Group and SME products. Group products and SME-focused products have shown different cost dynamics than retail individual products, with operational economics that include intermediary relationships, account management, and claims pattern handling specific to group risks. The FY26 and FY27 calibration is expected to differentiate group from retail more explicitly in the slab structure, recognising the distinct economics rather than applying retail benchmarks to group business by default.

4. Cyber and specialty lines. The growth of cyber insurance, parametric insurance, and other specialty products has surfaced operational economics that the broader miscellaneous category does not capture well. The FY26 update may introduce dedicated categories or sub-categories for these specialty lines, with calibrations that reflect their actual cost structure rather than averaging into the miscellaneous bucket.

5. Digital-first and embedded distribution. The distinct cost structures of digital-first insurers and of insurers using embedded distribution channels have surfaced as a calibration question. The FY26 update may introduce specific provisions that address these models while preserving the framework's neutrality between distribution channels in principle.

6. Calibration philosophy. The overall calibration direction expected from the regulator is incremental refinement rather than wholesale revision. The 2024 framework is viewed by IRDAI as broadly fit for purpose, and the FY26 and FY27 update is expected to address specific observed inadequacies in calibration rather than to redesign the structure. Insurers and intermediaries should plan for incremental changes that may be commercially material at the margin for specific lines and product categories, but that do not reset the strategic environment that the 2024 regulations established.

The allowable expense definitions in the 2024 regulations specify what counts as a management expense for the purposes of the EoM cap, distinguishing management expenses from claims costs, reinsurance ceded premium, and certain capital expenditure that is amortised through depreciation rather than directly expensed. The definitions matter because the categorisation determines whether a given cost item counts against the EoM cap or sits outside it, with material consequences for the insurer's calculated EoM ratio.

Several definitional questions have arisen during FY24 and FY25 reporting that the FY26 and FY27 update is expected to clarify.

1. Technology investment categorisation. The treatment of technology investments, particularly in cloud infrastructure, software-as-a-service subscriptions, and large policy administration modernisation programmes, has been a recurring question. The capital expenditure versus operating expenditure boundary is increasingly blurred in modern technology arrangements where the insurer subscribes to platform services rather than owning the underlying assets. The expected clarification will address the categorisation of these arrangements, the amortisation treatment of large one-time integration costs, and the segregation of business-as-usual technology operations from transformation programmes.
2. Distribution development expenditure. The treatment of one-time costs incurred in developing new distribution channels, including platform integration with Bima Sugam, embedded distribution arrangements, and digital-first business model investments, has been the subject of supervisory observation. The expected clarification will address the period over which such development costs can be amortised within the EoM framework and the criteria that distinguish development from operating expense.
3. Compliance and regulatory technology spending. The compliance investment required by the DPDP framework, the anticipated IRDAI cyber security v2 framework, the IFRS 17 transition through IND AS 117, and other regulatory requirements has been substantial for many insurers. The categorisation of these compliance investments within the EoM framework is expected to be clarified, with potentially a specific provision that recognises certain regulatory compliance costs separately from ordinary management expense.
4. Reinsurance commission and reinsurance-related costs. The treatment of reinsurance commission received and of reinsurance-related operational costs within the EoM calculation has been a long-standing area of complexity. The expected clarification will address the netting and gross presentation of these flows in the EoM ratio, with implications for insurers heavily dependent on reinsurance support.
5. Group company allocations. Insurers that are part of larger financial group structures often receive shared services from group entities including IT, finance, human resources, and risk functions. The allocation of group costs to the insurer subsidiary and the categorisation of these allocations within the EoM framework is expected to be clarified, with particular attention to ensuring that allocations are commercially reasonable, properly documented, and not used to manage the EoM ratio artificially.

The definitional clarifications are individually technical but collectively material. Finance functions at insurers should prepare to revisit their EoM categorisation against the anticipated clarifications, with particular attention to the technology and compliance investment categories where the calibration could go either way and where the financial impact is significant. The internal audit function should include EoM categorisation in its work programme to provide assurance on the consistency of treatment and the documentary basis for categorisation decisions.

The treatment of broker commission within the EoM cap is one of the most commercially consequential aspects of the framework. Under the current structure, broker commissions, individual agent commissions, corporate agent commissions, and other distribution remuneration count toward the EoM cap, creating direct pressure on insurer-side distribution economics. The interaction between the IRDAI (Payment of Commission) Regulations, 2023 and the EoM regulations is the operational mechanism through which distribution economics are constrained.

1. Commission as a major EoM line. For non-life insurers with significant broker-distributed business and for life insurers with agent-distributed business, commissions typically represent the largest single line of management expense, often 35 to 55 percent of total EoM. The cap on EoM therefore exerts indirect but significant pressure on the commission rates the insurer can sustain, particularly when other EoM lines including technology, operations, and corporate expense are also under pressure.

2. Commission rate negotiation. Insurers entering FY26 have been negotiating commission rates with brokers and other intermediaries in the context of the 2024 EoM regulations and the supervisory observations on FY25 performance. The general direction has been measured downward pressure on commission rates for product categories where the insurer's overall EoM position is tight, balanced against the need to retain competitive intermediary relationships. The FY26 and FY27 EoM update will affect this negotiation by setting the parameters within which insurer-side decisions are made.

3. Differential treatment of intermediary categories. The current EoM framework treats commission to all intermediary categories within the same overall cap, but supervisory observations have suggested that differential treatment may be appropriate to recognise the distinct economic functions of brokers, corporate agents, and individual agents. The FY26 update may introduce more nuanced commission treatment within the EoM framework, potentially with separate sub-allocations or with adjustments that recognise the broker's distinct value proposition relative to other intermediary categories. The specific design is uncertain at this stage of consultation, and brokers should be prepared for multiple scenarios.

4. Performance-linked commission and EoM. The 2024 regulations addressed performance-linked commission structures, including profit-share arrangements between insurers and intermediaries, with conditions on how these are recognised within the EoM cap. Industry experience has shown that the performance-linked structures require careful design to remain compliant while preserving the commercial incentive structure that they are intended to create. The FY26 update is expected to clarify several operational questions around performance-linked structures, with implications for insurers and brokers who have implemented or are considering such arrangements.

5. Commission disclosure and supervisory transparency. The EoM framework operates alongside disclosure requirements that surface commission economics to supervisors. Insurers are required to report commission spending in defined categories, with the supervisory data informing both the periodic review of EoM calibrations and the case-specific supervisory engagement where individual insurer patterns warrant attention. The FY26 update is expected to strengthen the disclosure requirements, with implications for the depth of commission reporting that insurers and intermediaries should prepare to support.

6. Implications for broker firms. The broker community should expect continued pressure on commission rates across product lines as insurers manage their EoM positions, with the pressure more pronounced in retail and SME lines where commission rates are already compressing due to Bima Sugam dynamics, and less pronounced in commercial mid-market and large corporate lines where the broker's advisory differentiation supports the economics. Broker firms should engage with their principal insurers on the FY26 and FY27 commission outlook, develop a multi-year view of commission economics by product line, and align their cost structure and revenue mix to the realistic environment rather than to the historical commission patterns. Brokers should advise commercial clients on the distinction between gross premium and commission economics, ensuring that clients understand the value the broker provides and the economic basis on which the broker provides it.

7. EoM and the Bima Sugam interaction. The interaction between the EoM framework and the Bima Sugam commission dynamics is particularly important. Insurers operating efficiently through Bima Sugam typically see lower commission expense than through traditional channels, which provides some headroom within the EoM cap. However, the headroom is partially absorbed by the technology and operational investment required for Bima Sugam integration and ongoing operation. The net effect on EoM varies by insurer and product line, and finance functions should model the combined effect rather than treating EoM and Bima Sugam as separate planning items.

The EoM framework is fundamentally a discipline mechanism, intended to ensure that insurers operate within sustainable management expense ratios that protect long-term underwriting profitability and solvency. The linkage from EoM to underwriting profitability operates through the combined ratio, which is the sum of the loss ratio (claims plus loss adjustment expense as a percentage of earned premium) and the expense ratio (management expenses as a percentage of earned premium). A combined ratio below 100 percent indicates underwriting profitability before investment income, while above 100 percent indicates underwriting loss.

1. Combined ratio dynamics. Indian non-life insurers have operated with combined ratios in the range of 105 to 125 percent in recent years for most lines, reflecting both loss ratio pressure (claim inflation, catastrophe events, particular line-specific dynamics) and expense ratio pressure (distribution costs, technology investment, regulatory compliance). The EoM framework targets the expense ratio component of the combined ratio, with the underlying expectation that disciplined expense management will support sustainable underwriting profitability over time.

2. Loss ratio interaction. The loss ratio component is not directly addressed by the EoM framework but interacts with EoM in several ways. Insurers with elevated loss ratios face greater pressure to optimise expenses to keep the combined ratio sustainable, while insurers with controlled loss ratios have somewhat more headroom in the expense ratio. The supervisory engagement on individual insurer EoM performance therefore considers the combined ratio context rather than the expense ratio alone.

3. Investment income and underwriting profit. Indian non-life insurers historically subsidised underwriting losses through investment income on policyholder reserves and shareholder funds. The investment income environment has been challenging in recent years with interest rate dynamics affecting the carry on fixed-income portfolios, increasing the pressure on underwriting profitability and indirectly on EoM discipline. The FY26 and FY27 environment is unlikely to provide significant relief on the investment side, reinforcing the importance of underwriting and expense discipline.

4. Solvency framework interaction. The EoM framework interacts with the IRDAI solvency framework, with sustained underwriting losses depleting capital and creating solvency pressure that triggers supervisory engagement and potentially capital action. The expected IRDAI Risk-Based Capital framework, addressed in a companion post on this site, will further sharpen the solvency consequences of underwriting discipline. Insurers and intermediaries should understand the EoM framework as part of an integrated supervisory architecture rather than as an isolated cost control mechanism.

5. Strategic implications for product and channel mix. Insurers operating in the FY26 and FY27 EoM environment should align their product and channel mix with the economic realities. Product lines with high loss ratios and limited pricing flexibility need particularly tight expense discipline to remain viable, while product lines with controlled loss ratios can sustain somewhat higher distribution and operating costs. Channel mix decisions should consider not only the immediate commission economics but also the underlying loss experience patterns by channel, which often differ materially between channels. Underwriting teams, distribution teams, and finance teams should work together on the integrated economics rather than optimising their respective dimensions in isolation.

6. Implications for broker-insurer dialogue. Brokers serving commercial clients should understand the EoM and underwriting economics that their principal insurers face, because the dialogue with insurers on commission rates, product terms, and renewal pricing is increasingly informed by these economics on the insurer side. Brokers who can engage substantively on the insurer's combined ratio dynamics, the line-specific economics, and the EoM framework implications are better positioned to negotiate effectively for their clients while preserving the broker's own economics. The dialogue requires preparation, market intelligence, and a willingness to engage with the insurer's commercial reality rather than treating the relationship as purely a price negotiation.

EoM compliance is a board-level accountability for insurers, with implications for solvency, profitability, and supervisory standing. The FY26 and FY27 update is an appropriate point for risk committees and finance committees to revisit their oversight of the EoM framework and to refresh their governance and reporting arrangements.

1. Named accountable executive and escalation lines. EoM compliance should be owned by the Chief Financial Officer or an equivalent senior executive with the seniority and reporting line to function effectively. The CFO should have direct reporting access to the board on EoM matters, with escalation paths defined for situations where the current operating performance is approaching or exceeding the regulatory caps. Several insurers in 2024-2025 found that the EoM oversight was effectively delegated to finance staff without sufficient senior executive engagement, with consequences when supervisory observations emerged.

2. Quarterly risk and finance committee review. EoM performance should be a standing item on the risk and finance committee agenda, with quarterly reporting that covers the current EoM ratio by line of business, the trajectory through the financial year, the principal drivers of variance against plan, the actions being taken to manage variance, and the projected year-end position against the regulatory caps. Risk and finance committees should ask probing questions on the categorisation of specific cost items, the basis for the projected position, and the management actions, rather than accepting status reports at face value.

3. Internal audit coverage. The internal audit function should include EoM in its risk-based audit plan, with audit work covering the categorisation methodology, the consistency of treatment across periods, the documentation of categorisation decisions, the accuracy of the EoM ratio calculation, and the reasonableness of management action plans. Internal audit findings should be reported to the audit committee with named owners and timelines for remediation.

4. External audit and assurance. The statutory audit of insurance financial statements covers EoM as part of the overall financial statement audit, but the depth of audit work on EoM categorisation and ratio calculation varies. Insurers may find value in separate assurance engagements on the EoM framework, particularly in the FY26 transition where definitional changes are being implemented.

5. Supervisory engagement preparedness. The EoM framework is supervised through periodic reporting and through case-specific engagement where individual insurer patterns warrant attention. Insurers should be prepared for supervisory engagement on EoM matters, with documentation, analysis, and management action plans ready to present to IRDAI. The preparation includes identifying the principal areas of supervisory interest based on the insurer's specific profile, ensuring that the management responses are well-developed before they are required, and maintaining the relationships with supervisory staff that support constructive engagement.

6. Action items for risk committees ahead of formal notification. Risk committees and finance committees should be taking specific actions in the period before formal notification of the FY26 and FY27 update. First, gap assessment against the anticipated framework, identifying areas where categorisation or operating performance is likely to come under pressure. Second, scenario modelling of the FY26 and FY27 EoM ratio under multiple plausible parameter calibrations, supporting strategic decisions on product mix, channel mix, and operating model. Third, dialogue with principal intermediaries on the commission outlook in the FY26 and FY27 environment, ensuring that the intermediary network has visibility on the direction and can plan their own economics accordingly. Fourth, internal preparation for the formal notification, including the operational implementation of any definitional changes, the system updates required for EoM reporting on the new basis, and the communication to the board, the rating agencies, and other external stakeholders.

Brokers should advise their principal insurers on the commission framework implications and should advise their commercial clients on the broader environment in which insurance economics are operating. The substantive engagement with the EoM framework is part of the advisory depth that defines mature broker-insurer-client relationships in the Indian market in 2026 and beyond.