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Life insurance companies have asked Insurance Regulatory and Development Authority of India (Irdai) to charge surrender value on the accumulated policy value of customers instead of having the threshold value as an absolute amount, sources said on Wednesday.
They said life insurance companies have put forth their recommendation, which will be submitted to the insurance regulator through the Life Insurance Council.
“We understand the thought process behind Irdai’s exposure draft on the surrender value about safeguarding the interests of the customers. After due deliberations, the companies have suggested that the surrender value could be linked to the accumulated policy value of customers instead of having it as an absolute amount,” an insurance official told Business Standard.
The accumulated policy value in an insurance policy represents the ‘savings component’ of the policy, where a portion of the premium paid by the policyholder is allocated after subtracting the cost of insurance.
The exposure draft by Irdai in December 2023 outlined the introduction of a defined premium threshold for each product, beyond which no surrender charges will be levied.
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The shift was believed to have a potential impact on the profit margins of non-participating products of these companies.
Irdai suggested that there shall be a premium threshold defined for each product, wherein, there shall not be any surrender charges imposed on the balance of the premiums beyond such threshold limits, irrespective of the timing of the surrender.
“If the surrender value is linked to the accumulated policy, the surrender charges will reduce in the long term for the customers whereas, it will remain higher during the short term deterring any disruptive behaviour among customers,” the official added.
Another industry official noted that insurance companies have understood the regulator’s apprehension about customer protection.
At the same time, Irdai realises the concerns raised by the companies as well and the impact that the decision could have on customer behaviour.
“It understands that the decision should not affect either the manufacturers of the insurance policy nor the customer,” the second official said.
Analysts expected Irdai’s decision to have an impact on the Value of New Business (VNB) Margin of the insurance companies will come down as it will affect the customer behaviour and lead to portability among insurers.
During the post earnings analysts’ call, Amit Palta, chief distribution officer of ICICI Prudential Life Insurance, said: “Our exposure to products which will attract surrender value is relatively much lower. While the regulations are yet to be seen in totality, we do believe that the impact of the same will be relatively higher on non-participating guaranteed products, which actually at current levels is close to around 11 per cent to 12 per cent of our business.”
The insurance companies have also recommended additional measures which will help in reducing mis-selling of policies, while at the same time safeguarding the interest of the customers by ensuring enhanced due diligence and stringent controls on sale of insurance policies.
They have also suggested introducing a fact sheet, which will elaborate the details of the policy including the benefits and exclusions in the insurance policy sold to the customer.
