On December 14, the Insurance Regulatory and Development Authority of India (IRDAI) issued a draft circular proposing that the surrender value on non-par insurance products like endowment and term policies be increased. The new rules are likely to be implemented in the year 2024.
The surrender value is the amount that the policyholder receives from the insurer if they decide to terminate the policy before its date of maturity. This stands as a clear advantage for policyholders, thus ensuring they receive a significant portion of their premiums if the policy doesn’t reach maturity. However, as life insurers will need to pay higher surrender values, it is anticipated to have a negative impact on their profit margins.
The insurance companies will have an impact due to the rise in surrender value as they would have to pay more to the policyholder. This will affect their profits. This may encourage such insurance companies to revisit product design for reducing surrenders while engaging with policyholders.
As per IRDAI data released recently shows that, 50% of the life insurance policies don’t see their maturities. The regulators and insurance companies are equally worried about reducing persistency ratios in the light of low insurance penetration of 2% in India, which is at an abysmally low as compared to developed and other markets in the World.
Currently, in case of premature surrender of non-par policies, charges are levied based on the value of premium received and is in the range of 10-70 percent. Charges are high if the policy is surrendered soon and lower when surrendered after five years.
IRDAI has also proposed a threshold level of premium for different products, beyond which an insurer will not be able to levy surrender charges and the premium will have to be returned to the policyholder.
However, the draft does not mention any threshold levels, so it is difficult to estimate the exact impact of the move. It could mean more customers will now invest comfortably in these products, but persistence could be under pressure. To offset the impact, insurers might introduce a commission structure that rewards distributors who can get the policyholders to hold on to policies for longer, i.e., better persistence.
Nevertheless, the proposed increase in surrender value for the lapsing customers will lead to some reduced value for the other three stakeholders including reduced returns for the persistent policyholders, lower payouts to the distributors, especially reduction in the initial years and above the threshold premium and some impact on the life insurer’s value of new business (VNB) margin.
IRDAI is aiming to boost insurance penetration in India, and the draft circular aims to do that. Currently, the draft circular is open for public comments and suggestions.
As part of its Mission 2047 ‘Insurance for All’, IRDAI is planning to expand the reach of insurance schemes and awareness across customer segments.
This will see a radical change in the nature of insurance buyers. As the level of awareness is on the rise, there will be more and more customised products. IRDAI has been taking measures to decrease the rigidity of life insurance products, encouraging flexible product design by insurers and benefitting policyholders.
The IRDA may come with many changes in this sector to achieve the target for 2047 for insurance for all.