Insurance stocks like LIC, HDFC Life, SBI Life, ICICI Prudential Life, ICICI Lombard were on a slippery slope on May 30, declining up to 1 percent after reports suggested that the Insurance Regulatory Development and Authority of India (IRDAI) may hike surrender value for insurance policies, revisiting its March proposal.
According to sources cited by CNBC-TV18, IRDAI may require insurers to pay higher guaranteed value or special surrender value if policies are voluntarily terminated. The development follows after the insurance regulator did not change surrender value in March 2024.
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Simply put, surrender value is the amount an insurance company pays to the policyholder when he or she decides to terminate the plan before maturity. When a policyholder opts to surrender a policy, the insurance company calculates surrender value based on number of premiums paid, duration of policy, and other factors.
Currently, if a policy is surrendered during the first year, the insurance company won't pay any amount. However, if surrendered in the second year, the insurance company will pay 30 percent of total premiums to the policyholder. Similarly, if it is surrendered during the third year, the company is liable to pay 35 percent. On the other hand, it will pay 50 percent of total premiums if the policy is surrendered between fourth and seventh year, while 90 percent if surrendered during the last two years.
The latest proposal also indicated that the insurers would be liable to pay higher guaranteed value as well as special surrender value. Guaranteed value is the minimum amount that an insurance company would pay a policyholder, while special surrender is usually higher than guaranteed value.
ALSO READ: Hike in surrender value could drag insurers' profitability, say experts
Moreover, IRDAI may also layout a provision to provide special surrender from the first policy year. This is in contrast to the current term as a policyholder acquires surrender value only after three annual premiums are paid.
Experts believe that if IRDAI now considers increasing surrender value, it might impact insurers' profitability as well as policyholders behaviour.
A Kotak Institutional Equities report in December said that though it is too early to assess the full impact, there would be a 120-200 basis point drag on the margins of private insurers.
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