IRDAI likely to water down higher surrender value proposal in relief for life insurers

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The Insurance Regulatory and Development Authority of India (IRDAI) is likely to accede to life insurers’ requests to dilute its draft product regulations that proposed lower surrender charges (and thus higher surrender value or payouts on early exit) for endowment policyholders.

However, details of the final decision are not yet clear, according to insurance industry officials Moneycontrol spoke to. The final surrender regulations could be in favour of life insurance companies, a CNBC-TV18 report on March 21 said.

Life insurers had raised concerns about asset-liability management issues that could crop up while implementing the IRDAI’s December 2023 proposal. The draft had mooted the introduction of threshold premiums and higher surrender values for endowment policies. The IRDAI is expected to put out a detailed circular soon.

Insurers opposed draft norms on higher surrender values

Simply put, surrender charges in insurance parlance mean penal charges for making an early exit.

“Our contention was simple – we offer long-term products and invest in long-term papers with tenures of up to 40 years. We are in the business of accepting long-term funds and giving long-term returns. To do so, we have to buy long-duration bonds and enter into forward-rate agreements. An insurance policy is not like a current or savings account, which can offer flexibility to withdraw funds anytime. In the case of life insurance, any sudden, early withdrawal will have repercussions for companies and other policyholders. Offering easy exits and higher returns over the long-term at the same time,” the CEO of a leading private life insurance company, who spoke to Moneycontrol on the condition that he would not be named, said.

Some insurers have proposed a middle path, where they launch an alternative product with lower surrender charges in each category. “Such products will offer higher surrender value on early exit but returns will be lower,” said the insurance firm CEO.

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.

For example, at present, a policyholder surrendering her policy (with an annual premium of Rs 1 lakh) after paying the second-year premium is entitled to get just 30 percent (Rs 60,000) 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 (Rs 1.65 lakh), as per Emkay Global's calculations, depending on the threshold premium — a concept introduced in the draft paper.

Most life insurers were not in favour of the proposal being finalised, but some private insurers, including Digit Life Insurance, had backed the draft regulations. 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, Kamesh Goyal, Chairman of Prem Watsa-backed GoDigit Group of Insurance Companies told Moneycontrol in an exclusive interview in February 2024.

Bima Sugam rollout on track

The insurance regulator has also decided that the much-awaited online insurance marketplace for the industry, intermediaries and policyholders – Bima Sugam – will be called Rashtriya Bima Sugam Nigam Limited, according to the CNBC-TV18 report.

“Insurance companies had made a similar recommendation. We felt that Bima Sugam ought to be prefixed with ‘Rashtriya’ or ‘National’, on the lines of the National Payments Corporation of India (NPCI),” said a top industry official who spoke to Moneycontrol on the condition of anonymity. IRDAI chief Debasish Panda has, on several occasions, referred to Bima Sugam’s proposed rollout as a potential UPI moment for the insurance space.