IRDAI’s diktat: Life insurance policyholders to get higher special surrender payouts on early exit from endowment plans

Individually, ICICI Lombard emerged the strong player out of the pack, garnering 22 percent YoY growth in May premiums

Brushing aside life insurers’ concerns around offering higher premature exit payouts to policyholders, the Insurance Regulatory and Development Authority of India (IRDAI) on June 12 retained most of the provisions related to higher special surrender value (SSV) for endowment policies proposed last month.

Put simply, compared to the present scenario, the surrender values - payouts on premature exit - for policyholders making an early exit due to realisation of mis-selling or inability to pay premiums will go up. Unlike now, when policyholders lose the entire premium paid if they exit after year one, they will get a part of their premiums back.

"While we anticipate a gross impact of approximately 100 bps on the company's new business margin (NBM) due to higher surrender value on early exits, we are confident in our ability to largely mitigate this impact without compromising the value proposition for our customers. We expect these measures to positively impact the long-term growth prospects for the industry," an HDFC Life spokesperson said.

Also read: Life insurance stocks firm as brokerages expect companies to digest new surrender value norms

“The increase is substantial in early policy years and the policyholders will now get much higher surrender values compared to the earlier regime. Given the fact that substantial number of policyholders surrender their policies in early years, this regulation would immensely benefit those policyholders in particular. The increase will also be applicable to surrender in latter years, albeit the quantum of such increase will be comparatively lower,” an actuary at a private life insurance company, speaking on the condition of anonymity, said.

Higher surrender payouts

IRDAI has said that that the SSV should be equivalent to at least the present value of the paid-up sum assured and paid-up future benefits (such as regular income payouts, if any). Paid-up value is calculated as per a formula: number of premiums paid X sum assured/total number of premiums payable.

In the draft master circular issued last month, insurers were to take 10-year G-sec yield into account for discounting purposes. “Now, the IRDAI has allowed a maximum spread of 50 basis points over 10-year G-Sec yield for discounting purposes to arrive at the Special Surrender Value (SSV). Allowing for the spread will result in reduction of roughly 4-5 percent in surrender value compared to the proposals made in the draft version,” he said.

Life insurers disappointed

As Moneycontrol had reported on May 31, life insurers had opposed the move to allow higher special surrender values on the grounds that these products are not meant to ensure liquidity, but long-term goals. “There will be implications for the industry. Reserving will have to go up and more capital will be required. Our alternative solution was to allow complete refund of premiums in case of mis-selling rather than offering higher surrender values. The upfront charges are high and it is difficult to recoup the commissions paid in the initial years,” said the CEO of a large private life insurance company.

Customer information sheet mandatory

Like in the case of health and general insurance, the insurance regulator has made it mandatory for life insurers to issue Customer Information Sheet (CIS) as part of policy documents .It is meant to, in simple language and concise manner, share information on clauses, policy benefits, premiums, and terms and conditions.

Newer products on the anvil?

The IRDAI had, in its product regulations issued in March, allowed insurers to design a host of products including index-linked plans, variable annuity payout options (where these will vary in line with publicly available benchmark as per the formula as specified in the insurer’s product filing documents) and so on.

More robust grievance redressal

To resolve complaints around insurers not complying with insurance ombudsman orders against them on time, the IRDAI has introduced additional penalties. So, insurers will have to pay policyholders penalty of Rs 5,000 a day if they do not honour the ombudsman order within 30 days.