The Insurance Regulatory and Development Authority of India (IRDAI) recently made a significant decision regarding surrender values in life insurance policies, opting to retain the existing regulations rather than implement proposed changes.
‘Surrender values’ refer to the amount paid by the insurer to a policyholder upon the premature closure of a life insurance policy before its maturity date.
This decision has sparked reactions from both insurers and policyholders, with implications for the industry as a whole.
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Impact on policyholders and industry reaction
IRDAI’s decision to maintain the current surrender value norms is a relief for life insurance companies, but it poses challenges for policyholders seeking early exits. The proposed changes, outlined in a December 2023 draft, aimed to increase surrender values, potentially benefiting policyholders.
However, starting April 1, 2024, the final regulations remain unchanged, benefiting insurers. Many life insurance companies opposed the December draft, expressing concerns about managing investments and liabilities. They typically invest in long-term assets with tenures of up to 40 years, resulting in lower returns for policyholders(customers) who stick with their policies throughout the original tenure.
Kamesh Goyal, Chairman of GoDigit Group of Insurance Companies, had taken a contrarian stand, backing the proposal to reduce surrender charges, highlighting the difficulties faced by policyholders(customers) and the necessity for customer-oriented solutions.
Market response and analyst perspectives
Life insurance companies, relieved by IRDAI’s decision, saw a surge in stock prices following the announcement. Shares of major insurers such as HDFC Life, Max Financial Services, and ICICI Prudential Life rose, ranging from 1% up to 7%, reflecting investor confidence in the regulatory environment’s stability.
Analysts view IRDAI’s retention of surrender value norms as positive for insurers, citing concerns about premature policy exits and potential disruptions to managing investments and liabilities. The decision aligns with industry requests and provides a stable framework within which insurers can operate.
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Comparative analysis and expert insights
Comparing the proposed changes to the existing regulations sheds light on the potential impact on policyholders. Under the revised guidelines, surrender values for non-linked products(insurance policies not tied to investment funds) vary depending on the policy term.
For example, the guaranteed surrender value (GSV) for policies surrendered within the first three years ranges from 30% to 75%, with higher percentages applicable in later policy years.
Additionally, an industry official noted that the regulation closely aligns with existing norms, providing policyholders an estimated 8-10% benefit in longer tenure (above five years) non-participating (non-par) policies.
Policyholder considerations:
Policyholders must carefully weigh their options when considering surrendering a life insurance policy. While IRDAI’s decision may appear to favour insurers, policyholders can still make informed decisions. Financial circumstances, future goals, and alternative investment opportunities should be considered before surrendering a policy.
Additionally, consulting with a financial advisor can provide valuable insights into the implications of surrendering a policy prematurely. By understanding surrender value dynamics and exploring alternative solutions, policyholders can make decisions that align with their long-term financial interests and goals.
Regulatory framework
Beyond surrender values, IRDAI’s final guidelines encompass broader aspects of life insurance products, including index-linked products, non-linked products, and pension products. The regulations aim to ensure transparency, accountability, and positive returns for policyholders across various insurance products.
- The final product regulations also note that the sale of index-linked insurance products will be linked to the net asset value of the underlying publicly available index.
- In the case of savings products, except for term insurance products with the return of premiums, the insurance regulator noted that survival benefits, including maturity benefits, shall result in at least a non-zero positive return to the policyholder.
- Pension products offered by life insurers to individuals are mandated to have defined assured benefits that are payable either in case of death or any health contingency if covered.
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Conclusion
IRDAI’s decision to retain surrender value norms reflects a balance between insurer interests and policyholder needs. Moving forward, the industry must navigate regulatory changes while prioritising customer satisfaction and financial sustainability.
As stakeholders adapt to the evolving landscape, a focus on transparency and fair practices will be essential in maintaining trust and confidence in the life insurance sector.
