Irdai's diktat on surrender value weighs on life insurance stocks

Bucking the overall positive market trend, life insurance stocks declined by up to 8 per cent on Friday after the Insurance Regulatory and Development Authority of India (Irdai) proposed a higher surrender value for life insurance companies.

In the last two days, the stock of Life Insurance Corporation (LIC) slipped by 1 per cent to finish at Rs 796.4, while SBI Life Insurance dropped by 1 per cent to settle at Rs 1452.6, and HDFC Life Insurance declined by 3.6 per cent to finish at Rs 673.1.

ICICI Prudential Life Insurance stock also bore the brunt. It tumbled to Rs 519.40 (a 4.2 per cent fall) and Max Financial Services ended at Rs 973.3 (a 7.9 per cent decline).

The proposed increase in surrender charges will affect the profitability and Value of New Business Premium (VNB) margin of the companies, analysts said.

“The Irdai released a circular that talks about increasing surrender values in the life insurance par and non-par product categories. This would affect the VNB margins for the life insurance companies and that's why the stocks have not done well in the last two days,” Suresh Ganapathy, managing director and head of financial services research at Macquarie Capital.

Irdai released an exposure draft that proposed to reduce surrender charges on life insurance products, especially non-par savings products.

There will also be a threshold level of premium beyond which an insurer will not be able to levy the surrender charge and the premium will have to be returned to the policyholder.

Under the present regime, the policy can be surrendered by the policyholder during the policy term if two full years’ premiums have been paid. However, no money will be refunded if the policy is surrendered before these years.

“The methodology will increase the payout for insurance companies to surrender policies which would technically benefit the policyholders but would have an impact on the insurers. The margins of non-par savings products which used to be quite high would materially come down if the circular gets implemented,” Jinay Gala, associate director, India Ratings & Research.

According to the H1FY24 earnings, the share of Non-Par in Individual Annualised Premium Equivalent (APE) of LIC stood at 10.76 per cent.

Among the private players, the share of non-par savings of HDFC Life Insurance stood at 28 per cent, SBI Life Insurance was at 39 per cent. Max Life Insurance has 26 per cent in non-par products.

“If the measures in the draft are implemented as they are, margins could be hit. If the measures are implemented retrospectively, persistency assumptions in EVs will have to be modified, leading to cuts in EV estimates. Product construct will have to be modified to factor in the changes,” according to a research note by Motilal Oswal.

The note added: “To offset the impact, insurers could introduce a commission structure that rewards the distributors with better persistency. A lower surrender charge can influence customers to invest more comfortably in products. As a result, volumes could increase, but persistency could be under pressure.”

According to analysts, the move is likely to boost the customer-centric approach emphasised by the insurance regulator as the decision will reduce the burden on policyholders.

The regulator asked stakeholders to give their comments on the draft by January 3, 2024.