Expense ratio

What is the expense ratio?

The expense ratio measures how much of an insurer's premium is spent on running and selling the business, as opposed to paying claims and benefits. Its two main parts are commission (paid to agents, banks, brokers and other distributors) and operating expenses (salaries, offices, technology, marketing and administration). Together they make up the insurer's expenses of management.

Insurers report several versions:

How expense ratios are regulated in India

Indian law limits how much an insurer may spend on management, including commission. The current rules are the IRDAI (Expenses of Management, including Commission, of Insurers) Regulations, 2024, in force since 1 April 2024, with a master circular issued in May 2024. They replaced separate 2023 regulations for life and non-life expenses and the 2023 commission regulations.

• General insurers may spend up to 30% of gross written premium on expenses of management, and standalone health insurers up to 35%.
• Life insurers have limits that depend on product type, premium paying term and policy year.
• Within these overall limits, each insurer sets commission through a board-approved policy. Fixed commission caps by product were removed.

Compliance is a live issue. In 2024-25, 8 of 25 life insurers exceeded the limits on an overall basis and 15 non-life insurers were non-compliant (IRDAI Annual Report 2024-25). By August 2026, IRDAI had barred four insurers from opening new places of business for six months over FY 2024-25 breaches.

Proposed changes (September 2026)

IRDAI's consultation paper "Recalibrating Economics of Insurance Distribution", released in September 2026, proposed a company-level EoM limit for life insurers of 15% of gross direct premium income within two years and 12.5% within five years. For general insurers it proposed moving from 30% of gross written premium to 20% of domestic gross direct premium within five years. It also proposed re-introducing commission caps that vary by channel and product. Comments were due by 25 October 2026. As of October 2026 these are proposals, not rules.

Expense ratios in India

For life insurers in 2024-25, the IRDAI annual report shows gross expenses of management of ₹1.38 lakh crore, or 15.60% of gross premium. The commission ratio rose to 6.86% from 6.21%, while the operating expense ratio fell to 8.73% from 10.73%. LIC's L-22 form for 2024-25 shows an expenses of management ratio of 12.42% and a commission ratio of 5.18%.

For non-life insurers in 2024-25, gross commission was ₹47,266 crore and operating expenses ₹37,811 crore. Together these come to about 28% of gross direct premium of ₹3.08 lakh crore (our calculation from IRDAI figures).

Worked example (illustrative numbers)

A general insurer writes gross premium of ₹2,000 crore. It pays commission of ₹360 crore and incurs operating expenses of ₹220 crore.

• Commission ratio: 360 ÷ 2,000 = 18%
• Operating expense ratio: 220 ÷ 2,000 = 11%
• Expenses of management ratio: 580 ÷ 2,000 = 29%, just inside a 30% limit.

Under a hypothetical 20% limit on the same base, the insurer would need to cut ₹180 crore of commission or costs.

What the expense ratio means for distribution

• Commission competes with every other cost. Because commission sits inside the overall EoM limit, an insurer that spends more on technology or branches has less room for distributor payouts, and the reverse.
• Tighter limits would reshape channel payouts. If the 2026 proposals are adopted, insurers will need to lower acquisition cost per policy. Channels with high payouts and weak persistency would be the first affected.
• Tax changes feed in. Since the GST exemption on individual life and health policies from 22 September 2025, insurers can no longer claim input tax credit on costs linked to that business, which raises the effective cost of commission and other inputs.
• Watch expense breaches. An insurer in breach of EoM limits may face regulatory restrictions on expansion, which can affect partner plans.
• For agents and partners: knowing the insurer's expense position helps in commercial negotiations. An insurer close to its limit has less room to raise payouts.