Top life insurance cos raise concerns over proposed change in policy surrender values

Top executives of large life insurance companies met with the chairman and members of the Insurance Regulatory and Development Authority of India (Irdai) recently, to express their concerns over a proposed change in the guidelines to calculate the surrender value of prematurely terminated policies.

Industry representatives said the changes as proposed could deal a “killer blow” to the sector. Any higher surrender value would lead to a fall in the persistency ratio – which indicates the proportion of policyholders regularly paying premiums – that has been just about 50% for more than five years, they claimed.

During the meeting with the regulator, they flagged the potential detrimental effects of the proposed policy on persistency, the chief executive of a company said on the condition of anonymity. “The proposed hike in surrender values could lead to higher lapsation of insurance policies, thereby lower profitability,” he said.
The changes, suggested by the regulator in the December 2023 draft product guidelines, seek to lower the surrender charges for policyholders.

The Irdai wants to change how surrender charges are calculated for traditional insurance plans. Under the proposal, charges will only apply up to a certain limit of the premium paid each year. Anything beyond that limit will be refunded to the customer. For instance, if someone pays ₹1 lakh annually for three years with a ₹25,000 yearly limit, surrender charges will only apply to ₹75,000 (₹25,000 x 3). Any amount exceeding this will be returned to the customer, potentially increasing the guaranteed surrender values. Currently, surrender values are determined based on a percentage of the premium and increase with the number of premiums paid each year.

Insurers have proposed to moderate the draft, imposing caps on certain charges while extending higher free look periods and refunds. Another suggestion is to introduce alternative products that offer higher surrender values but lower commission rates, providing customers with more options.They have argued before the regulator that persistency could suffer if the proposed changes are implemented. They said long-term products with premium paying terms exceeding 10 years would be particularly affected. Their fear is that distributors might incentivise policyholders to surrender existing policies and switch to newer ones, with promises of higher returns.

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