 "insurance claim")
The insurance regulator has proposed rules to protect policyholders by increasing the payout that they receive if they decide to discontinue their insurance policies before the maturity date.
Irdai has released an exposure draft on insurance guidelines, which among other things, proposes lowering surrender charges for life insurance products, especially non-par savings plans. Surrender value represents the cash value that a policyholder receives if they decide to surrender their policy before the maturity date for payment of the policy premiums. The regulator has proposed a premium threshold beyond which insurers cannot levy surrender charges, returning the premium to policyholders.
Stakeholders are requested to submit any comments or suggestions on the proposed regulations by January 3.
As per the new methodology, threshold premium shall be defined for each product and surrender charges will be levied only up to the accumulated balance of premiums; based on that threshold limit and not on the overall accumulated premiums.
"Currently, the surrender value is calculated as a percentage of the total premium paid. Let's say the surrender value of a policy is 50 per cent in the fourth year of a 10-year policy. So, if a policyholder surrenders his policy after paying Rs 1 lakh premium annually for four years, they would get only Rs 2,00,000 (100,000*4*50%) as surrender value against her total premium paid of Rs 4 lakh. Additionally, there may also be surrender charges," said Anuj Parekh, co-founder and CEO at Bharatsure, an insuretech company.
But as per the new proposal, if the threshold limit (a concept introduced under this proposal) is Rs 25,000 for such a product, then the surrendered value for the threshold premium is Rs 50,000 (25,000*4*50%). The premium refund beyond the threshold premium is 3,00,000 (1,00,000 – 25,000) x 4. Based on the above, the actual guaranteed surrender value then is Rs 3,00,000 + 50,000 i.e. Rs 3,50,000.
"This would generally be a positive for policyholders as it would entail they could encash their policies without suffering big losses. However, it could also mean increasing premiums to account for the losses that insurance companies may suffer. This could also impact the distribution commission for intermediaries," said Parekh.
" If implemented, the move will ensure a significant reduction of financial loss to policyholders who discontinue their policy midway. This is an extremely customer-friendly measure taken by the regulator given that a significant proportion of such policies get lapsed or surrendered before the completion of the policy term. Also, the majority of such lapses or surrender happen during the first two years of a policy where the quantum of financial loss to the policyholder tends to be the highest," said Sabyasachi Sarkar, Appointed Actuary, Go Digit Life Insurance.
Sarkar cites two examples:
Example 1
Someone has taken a non-single premium traditional policy with an annual premium of Rs 1 lakh and policy term of 10 years.
Comparison of GSV for Regular Premium Policy
Annual Premium: Rs 1,00,000 | Premium in Excess of Threshold Limit: Rs 80,000
Premium Threshold*: Rs 20,000 | Regular Premium Policy (Term: 10 Years)
*Note: The threshold limit has been assumed at Rs 20,000. No premium threshold has been defined in the current exposure draft. The Exposure Draft states that there shall be a Premium Threshold defined for each product.
Example 2
Let’s assume someone has taken a single premium traditional policy with a single premium of Rs 5 lakh and a policy term of 10 years.
Comparison of GSV for Single Premium Policy
Single Premium: Rs 5,00,000 | Premium in Excess of Threshold Limit: Rs 4,90,000
Premium Threshold*: Rs 10,000 | Single Premium Policy (Term: 10 Years)
*Note: The threshold limit has been assumed at Rs 10,000. No premium threshold has been defined in the current exposure draft. The Exposure Draft states that there shall be a Premium Threshold defined for each product
Analysts at IIFL Securities believe that while the proposal can potentially improve the attractiveness of traditional products, but it may likely hurt VNB margins because of higher payouts of surrender benefits.
As per the earlier regulations, a guaranteed surrender value was given only on payment of premium for at least two consecutive years, causing a loss for the policyholder if the policy had to be discontinued due to exigencies. However, the draft proposes Guaranteed Surrender Value even if the policy is surrendered in the first year, with the payout being equal to the balance premium over and above the threshold limit.
"The exposure draft suggests the threshold limit should be fair and equitable but does not define a methodology to calculate the threshold premium, neither does it clarify as to who would be setting the limit between the insurers or the IRDAI. If the insurers were to set the threshold limit, it could give them the power to manage their loss of surrender charges due to the new guideline but at the same time, allow them to differentiate on their product strategy," said analysts at IIFL.
