Policyholders' early exits can lead to asset-liability management issues for insurers, says Aditya Birla Sunlife CEO | Simply Save

The debate on the Insurance Regulatory and Development Authority of India’s (IRDAI)'s proposal offering higher surrender value to customers continues to dominate the mindspace of life insurance stakeholders, including insurers, intermediaries and policyholders.

IRDAI’s move to withdraw the December draft and maintain status quo on the surrender values structure for endowment policies has drawn flak from policyholders and independent financial experts. The new rules came into effect from April 1, 2024.

Insurers, however, argue that given that life insurance is a long-term contract that offers secure returns over longer periods of 10-50 years, they have to buy long-term government securities and enter into forward rate agreements. Therefore, if a policyholder decides to terminate the policy prematurely, insurers will have to face asset liability management issues.

Life insurance companies made representations to the insurance regulator regarding the higher surrender value proposals. To understand the factors that influenced the insurers’ opposition to the higher surrender value proposal, Moneycontrol’s Preeti Kulkarni spoke to Kamlesh Rao, MD and CEO, Aditya Birla Sunlife Insurance. Here are the key takeaways.

• Different product categories take care of different requirements. If the insurer has a short-term goal and needs liquidity, there are fixed deposits to cater to that need .
• But if policyholders are looking to save for the long-term, then there’s life insurance. For instance, where they pay premiums for 5-10-15 years and then the annuity payouts start from the 61st year onwards
• So, what does insurance do? It takes care for their long-term needs like retirement for a reasonably long period of time. For example, an annuity plan promises a return of, say, 5.5-6.5 percent for the rest of the policyholder’s life post her retirement.
• If, in this kind of a product, the surrender value must be high, it is a dichotomy. If an insurer has to guarantee returns over 40-50 years, it has to invest in a 40-50-year paper. They have to  enter into forward rate agreements (FRA), which are essentially interest rate protection instruments.
• The policyholder will pay premiums only over 5-6-7 years, but the life insurance company has to guarantee a rate today for the next 40 years. If, after three years, the policyholder wants his/her money back, it will lead to huge ALM issues for the insurers. They will have to reverse the FRAs and there will be a mark-to-market (MTM) loss.
• The other argument is that some policyholders may say they didn’t understand the product well, or that the features were not explained to them. In such cases, there is a point. However, here, the issue is not of surrender value. If they have not understood the product and have paid Rs 50,000 as premium, they should get the Rs 50,000 back.
• Sales processes could be made better, with the use of video verification, which is a better gauge of mis-selling than telephonic calls, as the policyholders’ facial expressions can be analysed to make sure whether they have understood the clauses.
• There must be provisions against mis-selling, for instance, measures to say that a 10-year premium payment policy cannot be sold to someone over the age of 60 years. If there is mis-selling, then there should be a mechanism to give the entire premium back.