Irda may stick to its guns on surrender charges

Industry strongly opposes the move to cap fees.

The insurance regulator is unlikely to revisit the cap on surrender charges that it has proposed on all life insurance policies from July. The industry has strongly opposed the proposal.

In the draft guidelines, the Insurance Regulatory and Development Authority (Irda) has suggested that the surrender charge during the first year of the policy be fixed at 12.5 per cent of the premium paid in case the policy term is less than 10 years. For longer duration policies, the charge is proposed to be capped at 15 per cent.

Insurers have to submit their comments by May 27 after which Irda will issue the final guidelines.

“We will issue the final guideline after receiving comments from industry players. We may not relook at the cap as it is not fair for policyholders to pay higher charges at the time of surrender,” said a senior Irda official.

The regulator moved to cap surrender charges after a complaint filed with its Ombudsman said a policyholder did not get any money after he surrendered his policy in the first year.

At present, insurers charge up to 60 per cent surrender fee in the first year, which drops up to 30 per cent in the second year.

At a meeting of the Life Insurance Council last week, industry representatives expressed concerns over the proposed cap, saying it would lead to more surrenders during the first three years.

“If the surrender charge is capped, policyholders will not face high penalty on withdrawing. This will encourage them to surrender even within the first three years of lock-in,” said the chief executive officer of a life insurance company.

“There was a discussion on surrender charges in the council meeting and insurers expressed their discomfort with the cap,” said Life Insurance Council Secretary General S B Mathur.

Out of 23 insurers, two want the cap to be removed while three want the ceiling to be raised to 30 per cent in the first year itself.

“Irda capped overall charges last October. Within this, fund management charges are capped at 1.35 per cent. It was left for us to recover all charges in the first five years. If the first-year surrender charge is capped, it will be difficult to manage expenses,” said the chief executive officer of a mid-sized life insurance company.

In addition, the draft norms say that for unit-linked insurance products with tenures of less than 10 years, there should be no surrender charge from the sixth year, while for policies with tenures of over 10 years, the charge is proposed to be removed from the seventh year.