Irdai keeps status quo on surrender charges

THE STATUS quo provides a big relief to insurers, who otherwise had tough task of balancing the impact of increased surrender value to lapsing customers.

The insurance regulator’s decision to roll back its proposal of paying higher surrender value to policyholders of endowment plans has provided relief to life insurers, more so to low profitability smaller players.

Surrenders are an onerous customer proposition for traditional products – both par and non-par. Policy surrender in the second and third year can lead to 70 per cent of policy corpus being appropriated as surrender charges by life insurers and boosting their lapsation profits.

Similar action in the fourth and fifth year can lead to roughly 50 per cent of your corpus being charged off.

Bowing to pressure from life insurers, the insurance regulatory and development authority of India (Irdai) decided to retain the existing surrender value norms which analysts have termed positive for insurers’ margins. The norms will be effective on

April 1, 2024.

“The lapsation profit component is typically highest for non-par savings products, with company specific exceptions. The biggest impact is, however, for low profitability smaller players, for whom this development is of existential salience, in our opinion,” Santanu Chakrabarti, analyst at BNP Paribas Securities, said.

“The status quo provides a big relief to insurers, who otherwise had tough task of balancing the impact of increased surrender value to lapsing customers by tinkering the distributors payout, providing benefit to the persistent policyholders, and maintaining shareholders profitability,” said Emkay Global report.