HDFC Life Insurance and other insurers in talks with IRDAI on draft surrender value regulations, says ED and CFO

The 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.

HDFC Life Insurance and other insurers are engaged in conversations with the Insurance Regulatory and Development Authority of India (IRDAI) around the draft norms proposing to increase the surrender value on non-participating (non-par) insurance products, said Niraj Shah, Executive Director (ED) and Chief Financial Officer (CFO), HDFC Life Insurance.

On December 14, the IRDAI issued a draft circular proposing that the surrender value on non-par insurance products be increased. 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.

“We are still in conversations with the regulator as an industry and a company. We are all completely aligned to giving the customer a better stronger proposition,” Shah said in a conversation with Moneycontrol after announcing the October-December FY24 results.

Also read: HDFC Life Insurance Q3 results: Net profit rises 16% to Rs 365 crore

According to the latest data available with HDFC Life Insurance, the insurer’s product mix includes 28 percent of non-par products. In the corresponding quarter last year, it was at 39 percent. ICICI Prudential’s latest data showed that the insurer has 27 percent of non-par products and that of SBI Life stands at 14.7 percent.

Saurabh Bhalerao, Associate Director, BFSI, CareEdge, highlighted that calculating the impact of the norms on insurers is tough as companies are looking at diversifying their products mix.

“We may see some impact on the margins but insurers are working at diversifying their product mix which makes it tough to calculate the exact impact,” Bhalerao said.

What does the circular say?

The regulator has proposed a high surrender value on non-par insurance products. A non-par policy is a product that does not provide dividend payouts and policyholders cannot share the insurance company's profits. Additionally, these policies do not offer any annual payouts but contrary to par products, most non-par policies offer a guaranteed maturity benefit. Some examples of non-par products include a term insurance policy or fixed life insurance policy.

The 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.

Highlighting that discussions are happening between HDFC Life and IRDAI on the circular, Shah said that there are certain technical aspects of the draft that need to be discussed with the teams of IRDAI and we are doing that.

“We do believe that there are opportunities to examine some of those aspects where we can continue to retain our customer proposition while giving better values,” said Shah.

Also read: IRDAI's proposal to hike surrender value for non-par products could impact insurers’ VNB margins, profit, say experts

Experts’ take

Some brokerage reports said that calculating the impact on insurers is tough since the circular does not give a range on the threshold level of increasing the surrender value.

Domestic brokerage firm Motilal Oswal explained in a note that the draft does not mention any threshold levels, so it is difficult to estimate the exact impact of the move. “However, it could mean more customers will now invest comfortably in these products, but persistence could be under pressure,” Motilal Oswal said.

Additionally, Motilal Oswal said: “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.”

The circular, which could impact the non-par products of insurers, can affect the value of new business (VNB) margins, experts said. VNB is the present value of future profits associated with new business written during the quarter.

Additionally, to assess the non-par business, for example, HDFC Life Insurance’s non-performing assets (NPA) in the product segment has been decreasing sequentially and on a year-on-year (YoY) basis. For the October-December FY24 quarter, the insurer’s gross NPA for linked non-par policies stood at Rs 66 crore compared to Rs 71 crore in the corresponding quarter last year.

In line with this, analysts of the brokerage house suggested that growth in the non-par segment of HDFC Life Insurance will be concentrated. “While protection has picked up momentum, the growth in the Non-par segment is likely to be concentrated in the later part of the year," analysts said.