The Insurance Regulatory and Development Authority of India’s (IRDAI) December 2023 proposal to lower the surrender charges – penalties for early exit – on traditional endowment policies is a customer-friendly move, says Kamesh Goyal, Chairman, GoDigit Group of Insurance Companies.
Goyal’s stance is contrary to that of several life insurance companies which have strongly opposed the proposal.
“My sense is IRDAI will not get influenced by it and they should not, because at the end of day, their mandate is to do what is good for the customer. And as I said, we don't have a problem at all with these norms. I am 100 percent certain that it’ll lead to growth,” Goyal said.
Opacity in financial products leads to distrust and anything that is seen with suspicion cannot actually grow, he said.
Also read: Year-end special 2023: Budget shocker, IRDAI expense regulations defined 2023 for insurance industry
Proposed norms promise higher surrender payouts
Most life insurance companies are lobbying for the withdrawal of - or relaxation in - provisions of the IRDAI’s draft product regulations that promise higher surrender pay-outs than are currently made to policyholders who may want to make an early exit.
Insurers opposed to the proposal have cited asset-liability management (ALM) challenges and lower IRR (internal rate of return) to persistent policyholders (those who continue paying premiums) as problems arising out of higher payouts, during their meeting with the insurance regulator on February 5.
As per the December 2023 draft product norms, policyholders terminating their life insurance policies before completing the original tenure would have to pay lower surrender charges, thus taking home more of the premiums paid until then. Surrender charges mean penal charges for making an early exit, in insurance parlance.
For example, at present, a policyholder surrendering her policy after paying the second-year premium is entitled to get just 30 percent of her premiums back. If the IRDAI’s December draft were to be finalised in its current form, this ‘premium refund’ could go up by 175 percent, depending on the threshold premium — a concept introduced in the draft paper.
Like most life insurance policies, guaranteed savings insurance policies, or non-participating endowment policies, are sold as long-term policies, but the high surrender charges and lapsation rates mean that most policyholders lose money if they make an early exit, Goyal pointed out.
“Data shows that if the premium payment term is more than five years, we are actually seeing less - just about 50 percent - persistency even for the best companies. Unless a customer pays three years’ premiums, they don't get anything at all. So, when you see it from that perspective – if you look at the last ten years and, say, 100 households have bought a non-par policy, 90 percent of them would have lost money. Almost the entire commission is also upfront. So, basically, this product is not long-term in nature. And with the sort of losses that it is causing, it doesn't make any sense from a customer's perspective,” he said.
Industry needs good, customer-friendly products to grow
The proposal will also adversely affect GoDigit Life, which is the most recent entrant in this space, having received the licence in 2023. However, a move that is in customer interest will eventually benefit the industry too, said Goyal. “We will also suffer with all these changes. In fact, our life will be even more difficult, because our expenses in the first five years will be higher. So, every surrender will cause a huge economic loss. But if we, as an industry, cannot give decent products to the customer, how would we ever grow? So that's the reason why I'm saying this,” he said.
Goyal had put forth similar views at the Global Actuarial Conference in Mumbai on February 13. “When I decided to speak publicly, it was to say that this behind-the-door lobbying was not good. We need to discuss these things fairly openly,” he said.
Industry to benefit in the long-term
Though other insurers are against this move, it will work in favour of the industry too, as was the case with mutual funds. “All arguments which the life insurance industry is making today are very similar to those of mutual funds’ in 2010. They were of the view that if there were no exit charges, customer would actually exit, and churn would increase. (However) because the customer value proposition improved, it just led to massive growth and customers are sticking to mutual funds,” Goyal said.
The GoDigit Chairman believes that higher management expense outgo is a hurdle in the path of devising and selling more products that are in customers’ interests. “In the case of a non-par product, if you're buying a single premium policy, even today you can get a guaranteed return of 7-7.5 percent. In a fixed deposit, post-tax, you will get a guaranteed return of 5.1-5.5 percent, depending on your tax slab,” he said.
Yet, such products are not promoted heavily. “Now, why doesn't the industry sell single premium policies? This is because they have very low management expenses built in. People (insurance company officials) want to have lavish salaries, big offices, foreign travel and holidays. Now who will pay for this? At the end of day, the customer is paying for this. So, you have good products, but they are not being sold because management has no interest in selling these,” he said.
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