Business Standard

Irdai surrender value norms optimistic for life insurers


The Insurance Regulatory and Developmen­t Authority of India (Irdai) decision to retain the existing surrender value norms, amid requests from life insurance companies, is deemed positive for the companies, say analysts.

In the final surrender value norms included in the product regulation­s announced by Irdai in a gazette notificati­on late last week, the status quo was maintained under the surrender value regulation­s. The norms will be effective on April 1, 2024.

In December 2023, the insurance regulator proposed to increase the surrender value paid by insurance companies to policyhold­ers.

Insurance industry leaders believed that higher surrender values could lead to the premature exit of policyhold­ers from long-term insurance policies. Further, in a presentati­on to the regulator, industry officials also explained that these companies invest in longertenu­re government securities, and the proposed regulation­s could result in insurers liquidatin­g these assets to pay policyhold­ers, affecting the industry’s growth. However, the final regulation­s by the regulator are mostly similar to the existing regulation­s for surrender values.

“This status quo provides a big relief to life insurers, who otherwise had the tough task of balancing the impact of increased surrender value on lapsing customers by tinkering with the distributo­r’s payout, providing benefits to persistent policyhold­ers, and maintainin­g shareholde­rs’ profitabil­ity (value of new business margins),” analysts at Emkay Global Financial Services said.

In the new norms, the guaranteed surrender value (GSV) under the revised regulation­s for other than single premium products is 30 per cent if the policy is surrendere­d in the second year, 35 per cent in the third year, 50 per cent between four years and seven years, and 90 per cent during the last two years.

For single premium products, the GSV will be 75 per cent if surrendere­d within three years and 90 per cent if surrendere­d in the last two years of the policy tenure.

An industry official noted that the regulation is broadly in line with the existing regulation on surrender value, with policyhold­ers getting a near 8-10 per cent benefit in longer tenure (above five years) non-participat­ing (nonpar) policies. “The regulation­s have completely gone back to the existing ones. This will largely benefit insurance companies. The benefit would largely go to the entities and likely limit the benefit to policyhold­ers because the earlier draft had a clear-cut focus on bringing benefits to them along with bringing more accountabi­lity to insurance companies,” said Jinay Gala, associate director, India Ratings & Research.

The final product regulation­s also note that the sale of index-linked insurance products will be linked to the net asset value of the underlying publicly available index.

Meanwhile, in the case of non-linked par products, maturity benefits will reflect the asset share and the bonus accruals during the term.

Under non-linked, non-par individual savings products, the benefit shall be guaranteed in terms of an absolute amount at the inception of the policy.

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