BS BFSI Summit: 'Changes to surrender value norms in interest of customers'

Apart from commission structures, the insurance companies can also try other levers to absorb the impact

Changes to surrender value norms by the insurance regulator are in the best interests of customers and will boost insurance penetration, according to leading industry players. At the Business Standard BFSI Insight Summit, insurance executives highlighted their strategies to mitigate the impact of these changes.

 

During the summit, a panel of life insurance chief executive officers (CEOs), moderated by Business Standard’s consulting editor Tamal Bandyopadhyay, discussed the topic: ‘A Case for Increasing Coverage?’ While surrender charges have been a pain point for insurers, they have managed this challenge by adjusting commission structures.

 

“The regulator is moving towards a customer-friendly solution. While the surrender charge is an immediate worry, it will ultimately contribute to increasing the insurance market. India offers the most customer-friendly and transparent products. Our goal is insurance for all by 2047. Although there is some short-term pain and a slight disconnect between what insurers do, we are offering very long-term, guaranteed products. Allowing early exits could potentially lead to an asset-liability mismatch, especially when interest rates shift sharply. However, I believe that issue is now behind us,” said Vibha Padalkar, managing director (MD) and CEO of HDFC Life Insurance.

 

 

“We don’t want customers to exit since these are long-term products, but we will monitor how things evolve. These are just growth pangs,” she added.

 

In addition to revising commission structures, insurance companies are exploring other levers to absorb the impact.

 

“We had to rework some commission structures with our partners, including deferring commissions and implementing clawbacks for customers. Many of us have done this in parts of our distributions. We’re also absorbing some of the impact as margins in the business. Interest rates will also need to be reviewed, though none of us have made any changes to interest rates based on this so far,” said Mahesh Balasubramanian, CEO of Kotak Life Insurance.

 

“By pressing multiple levers, we should be able to absorb this impact. This will ultimately reassure customers about the insurance sector and make them more confident in purchasing policies. In the long run, this will drive increased demand,” he added.

 

In 2014, surrender values increased across the industry, but it is believed that this did not have a negative impact. The insurance regulator introduced changes to surrender values, effective October 1, 2024.

 

“Principally, last December, before the regulation, we introduced a product with zero surrender charges. To achieve this, however, we had to adjust the commission structure and eliminate upfront commissions, also borne out by customer behaviour. People don’t buy policies to surrender them. The key issue with surrender value is whether the customer is facing a temporary or permanent liquidity issue. If it’s temporary, we offer loans against policies, which are instant and easy to access. For permanent liquidity needs, if a policy is surrendered, the customer shouldn’t lose too much money, though some penalty is justified since it’s a long-term product,” said Anup Bagchi, MD and CEO of ICICI Prudential Life Insurance.

 

The panel agreed that any approach focusing on building long-term customer interest should not prioritise liquidity. Encouraging a liquidity-driven approach is inadvisable. For cases of permanent liquidity needs, associated costs should be minimised. To address this, companies are employing strategies like deferred and clawback commissions. Similar to unit-linked insurance plans, the market is expected to stabilise over time. Ultimately, the industry is committed to protecting customer interests, as anything that enhances trust is beneficial for the sector.