Irdai retains surrender value norms, positive for life insurers: Analysts

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 longer-tenure 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 (non-par) 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.

Furthermore, 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.

In the case of savings products, except for term insurance products with the return of premiums, the insurance regulator noted that survival benefits, including maturity benefits, shall result in at least a non-zero positive return to the policyholder.

Further, pension products offered by life insurers to individuals are mandated to have defined assured benefits that are payable either in case of death or any health contingency, if covered.

Also, defined assured benefits should be payable upon vesting under non-linked pension products, whereas for linked pension products, there is an option to pay the assured benefit for linked insurance products.