Surrender value norms: Life insurers begin rolling out revised bestsellers

With the new surrender value norms effective from Tuesday, most life insurance companies are immediately rolling out revised versions of their best-selling, non-participating products.

These contribute a significant portion to their overall premiums, in line with the Irdai Product Regulations 2024. The remaining products in their portfolios will be rolled out in due course, with a target completion by December, industry insiders suggested.

In June this year, insurance regulator Insurance Regulatory and Development Authority of India (Irdai) issued a ‘Master Circular on Life Insurance Products.’ Here, it introduced norms to ensure better payouts for customers who exit their policies prematurely.

According to the revised norms, life insurers have to pay an enhanced special surrender value (SSV) after the completion of the first policy year provided the customer has paid one full-year premium. So far, companies did not pay such an amount to customers surrendering their policies in the first year.

Additionally, the norms stated that the discount rate for discounting the paid-up value to calculate SSV will be allowed up to 50 basis points (bps) higher than 10-year G-Sec yield.

“In accordance with the Irdai Product Regulations 2024, IndiaFirst Life is well prepared with revisions to products that contribute 85-90 per cent of our business,” said Rushabh Gandhi, managing director (MD) & chief executive officer (CEO), IndiaFirst Life Insurance.

“Recent regulatory changes are aligned with the noble vision of achieving ‘Insurance for All’ by 2047. We believe this goal can be realised by optimising the value proposition for customers, shareholders, and distributors alike, which is the ethos that we are working with,” he added.

Most major life insurance companies have products in excess of 30. It was becoming difficult for the companies to revise all their products, in accordance with regulations by the deadline.

Hence, the companies had written to Irdai seeking a three-month deadline extension to implement the surrender value norms, which has not been accepted by the regulator.

Insurers had indicated that they would need more time to revise their non-par products and renegotiate commercials with distributors.

Industry sources said that the new norms will have a bearing on the commissions insurance companies pay to distributors, as well as the internal rate of return (IRR) for customers.

However, insurers suggested the impact on IRR is mostly due to the change in the interest rate cycle.

Life insurance companies had not revised the IRR for a while now, despite the yields on 10-year government securities trending downwards since April 2024, when the 10-year G-sec yield was at 7.2 per cent.

Currently, the 10-year G-sec yields are hovering around 6.8 per cent.

According to an industry source, when it comes to commission arrangements with distributors, the industry is considering three options — clawback of commissions, reduction in commissions, or spreading commissions over 2-3 years.

A combination of two or more of these options may also be on the table.

“All of us have clarity on what we have to do in terms of product, technology and sales perspective. We are ready to launch our key products in compliance with the new norms. We mostly expect the rest of the products to be ready by December 2024. The biggest focus of the industry will be on the quality of business as persistency will become more important,” said Pankaj Gupta, MD & CEO, Pramerica Life Insurance.

According to Ramkumar S, Partner, Grant Thornton Bharat, legacy insurance products of insurers will be modified through the ‘Use and File’ route. Changes in incentives paid out to various sales channels will also go through a change, and there will be a claw back which will need to be considered on surrender from policyholders.

“Additional provisions will need to be created on change in surrender period which has moved from 3 years to 2 years for traditional products. Overall, the regulations are aimed at benefiting the policyholders by offering better returns to those who exit early from their life insurance policies,” he said.