IRDAI's higher surrender value proposal may again find stiff resistance from life insurers

IRDAI has proposed higher premature exit payouts to policyholders in the form of special surrender value (SSV)

Surrender values in endowment policies are back in the news again.

A day after the Insurance Regulatory and Development Authority of India (IRDAI) mooted a proposal that aims to offer higher surrender values – payouts on early exits – to policyholders, life insurance companies have decided to make a case against the draft rules being implemented in their current form.

IRDAI's fresh proposal on surrender values

If the new proposal goes through, policyholders will be entitled to a special surrender value (SSV) from the first year. At present, if a policyholder decides to surrender her policy after paying the first premium, she has to forgo the entire amount.

Companies have to revert to the insurance regulator with their feedback by Friday, May 31.

While it has not proposed any changes to the guaranteed surrender value (GSV) structure, the IRDAI has said that insurers can offer GSV higher than what is mandated in the April product regulations.

What insurers are saying

“There is no doubt that steps in policyholders’ interests should be taken. But there are other ways to achieve IRDAI’s goals, without impacting the sanctity of the long-term nature of life insurance products,” said a top official from a leading private life insurance company who is privy to the discussions among life insurers.

According to him, ensuring liquidity cannot be the primary purpose of life insurance products. “If you are buying a policy with the intention of making a withdrawal in one or three years, this is not the product for you. In such cases, you should look at fixed deposits or mutual funds. Life insurance products are structured to meet the long-term needs and goals of policyholders,” he added.

Also read: How to avoid falling prey to life insurance mis-selling traps

Insurers’ alternative solution to curb mis-selling

For those policyholders with genuine grievances – for example, those who are stuck with products that were mis-sold to them, insurers have an alternative solution. “If it can be established that the policy was mis-sold, the entire premium paid can be returned. This will be a more effective remedy for mis-selling , rather than changing the product construct itself,” he said.

Higher payouts on premature exit, right from year one

IRDAI has proposed 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.

The insurance regulator has specified 10-year G-Sec yield as the interest rate for calculating the present value of paid-up sum assured and paid-up future benefits.

"This move is in favour of policyholders. Under IRDAI’s new proposal, let's say a policyholder's annual premium is Rs 100, and she is entitled to receive Rs 1,000 (sum assured) in the 10th year. But, if she ends up surrendering her policy after paying the first premium, the paid-up sum assured will be Rs 100 and she will get Rs 50.8 back as SSV (nil under the current regime). The IRDAI’s proposed SSV computation methodology assumes a discounted rate of 7 percent, which is the current 10-year G-sec yield. Likewise, SSV in the subsequent years will also be higher (bonus has not been taken into account in this calculation)," said an actuary at a private life insurance company, who spoke on condition of anonymity.

While SSV is not a fresh concept and life insurance product benefit illustrations carry details of SSV and GSV, the insurance regulator has now specified the new method for computing SSV.

Life insurance companies also intend to request IRDAI to allow a higher discounted rate – that is, 10-year G-sec rate plus a spread - as the present proposal (discounted rate equal to 10-year G-sec yield) will call for more capital and squeeze companies’ margins.

Also read: IRDAI’s status quo on surrender charges a relief for insurers, but setback for policyholders

The long-winding surrender saga

The surrender story has now dragged on for nearly five months after the IRDAI, in December 2023, proposed higher GSV for policyholders. The proposal was scrapped after life insurers raised objections, citing asset-liability management challenges and lower returns to persisting policyholders.

The new product regulations, therefore, maintained status quo on GSV. The IRDAI has now laid out the methodology for SSV calculation , but this will certainly not be the last that has been heard on this matter.