Irdai's Proposed Changes to Surrender Values
MAS Team | 15 December 2023
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The Insurance Regulatory and Development Authority of India (Irdai) is set to shake up the insurance landscape with its draft product regulations, compelling insurers to reassess profit margins and restructure distributor commissions. The draft circular, if implemented, particularly targets surrender value rules for non-linked life insurance policies.
 
Currently, under the existing Irdai regulations for non-linked insurance products, surrender values are determined based on a percentage of premiums paid by policyholders, scaling with the number of premiums paid. The framework aims to provide a percentage of surrender value based on premiums paid, with the customer receiving a smaller percentage for early exits, considering the long-term nature of life insurance.
 
In a bold move to enhance benefits for policyholders, the regulator proposes a significant shift. According to the draft, surrender charges would be applicable only up to a defined threshold limit of the premium for each product. Beyond this limit, insurers cannot impose surrender charges, and the entire balance of premiums exceeding the threshold will be refunded to the customer.
 
Here's a practical illustration: Consider a non-participating policy with an annual premium of Rs1 lakh for the first three policy years. Assuming a threshold limit of Rs25,000 per year, the surrender value percentage (e.g., 35% for third-year surrender) will be applied only up to Rs75,000 (Rs25,000 * 3). Any premium amount beyond this threshold will be fully refunded to the customer. This move is expected to substantially increase the guaranteed surrender value for policyholders.
 
While the proposed changes will boost the guaranteed surrender value for policyholders, there is a potential impact on the profit margins of life insurers. The shift may lead insurers to reconsider commission structures, possibly deferring commissions beyond the first year and link it to premium payments to mitigate losses associated with early policy exits.
 
The proposed changes are subject to the opinions and feedback of insurers, opening a space for industry stakeholders to voice their perspectives through the consultation paper. If implemented, these changes could reshape the dynamics of surrender values and their implications for insurers and policyholders alike.