Life insurers' pushback: Industry urges IRDAI to relax proposed higher surrender value norms

Will IRDAI rethink its December 2023 surrender value proposal?

A number of life insurance companies have urged the Insurance Regulatory and Development Authority of India (IRDAI) to roll back some provisions related to surrender charges in the draft product regulations released in December, people with knowledge of the matter told Moneycontrol on condition of anonymity.

Call for review of proposed product regulations

In a meeting with the regulator on February 5, some insurers specifically requested the IRDAI to relax the proposed provisions related to surrender charges. As per the December 2023 draft product guidelines, 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 the current form, this ‘premium refund’ could go up by 175 percent, depending on the threshold premium—a concept introduced in the draft paper.

“At the meeting with IRDAI officials, most major life insurance companies strongly opposed the provisions of the December 2023 draft that proposes higher surrender values for policyholders, particularly in the early years,” an industry insider privy to the matter told Moneycontrol on the condition that he would not be named.

Also read: Higher insurance agent commissions to continue, but IRDAI asks insurers to adhere to EoM caps

Disadvantage customers?

Insurers want the regulator to make room for principle-based regulations, which could mean that surrender payout calculations would be essentially left to the discretion of insurance companies and their actuaries, subject to certain yet-to-be-defined broad principles.

However, not all insurers and stakeholders agree.  A top industry official requesting anonymity said: "It is highly unlikely that customer interest will be well taken care of if such a dilution goes through. Insurer are citing lower internal rate of return (IRR) for customers as one of the reasons that warrant the rollback, but the fact is that they are simply yielding to pressure from their intermediaries."

According to him, principle-based regulations will not be in customer interest. “For example, earlier, unit-linked insurance policies (Ulips) came with exorbitant built-in higher premium allocation charges, which primarily went towards paying commissions to agents. This caused huge financial losses to customers until the regulator came out with objective regulations on Ulip charge caps. If the shift to principle-based approach goes through, it will be amongst the few instances of exposure drafts undergoing a huge change, resulting in a major rollback,” he said.

Discussions to continue

Earlier, when the proposal was released, some insurance CEOs and independent experts had expressed concerns around potentially lower returns for policyholders who persist - pay premiums over the long-term or until maturity.

“There is an impression that insurers are concerned about the proposed surrender value provisions because of the higher embedded commissions, but that is not the case at all. This is not linked just to agents’ commissions, but also has a lot to do with ALM (asset-liability management) as life insurance products entail long-term investments. Then, there is market-value adjustment to be made,” said a senior insurance executive, who did not wish to be named.

Insurers also fear increase in lapsation of policies if the proposed surrender value regulations were to be finalised. “Distributors could induce people to surrender existing policies and switch to newer policies, promising higher returns. And customers, too, could yield easily as they would now (if proposal goes through) have relatively less to lose,” the CEO of a private life insurance company had told Moneycontrol.

Another life insurance CEO said that the current discussions were only preliminary in nature. "The consultation is going on, nothing concrete has emerged so far. Insurers will put forth a proposal after the consultations are over," he said.