Life Insurers to seek extension on implementing surrender value norms

Life insurance companies are planning to seek a three-month deadline extension from the regulator on the implementation of surrender value norms, said multiple people aware of the development.

New product launches could slow down due to the new norms, which need to be implemented before September 30, 2024.

According to sources, the insurers will need more time since revising all the traditional products and renegotiating commercials with the distributors on the revised products is a logistical challenge.

In June, Insurance Regulatory and Development Authority of India (Irdai) issued the ‘Master Circular on Life Insurance Products’, wherein it introduced norms to ensure better payouts to customers who exit policies prematurely.

According to the revised norms, life insurers have to pay an enhanced special surrender value (SSV) after the completion of the first policy year, provided the customer has paid one full-year premium.

Currently, companies do not pay such an amount to customers surrendering their policies in the first year.

Additionally, the norms stated that the discount rate for discounting the paid-up value to calculate SSV will be allowed up to 50 basis points (bps) higher than the 10-year G-Sec yield.

Revising all the traditional products, according to the new surrender value norms, and renegotiating terms with the distributors within the timeline is a huge challenge.

Hence, the industry is looking to seek an extension in the deadline to implement the new norms, said one of the sources.

Another source indicated that the insurers are likely to seek an extension to the September-end deadline because the industry will take time for re-pricing the existing products and re-filing them.

“Also integrating these products into the platform and training distributors for these products also require time. It is a total rehaul of everything”, the source added.

Life insurance companies, because of the new norms, will have to discontinue their current products and refile them by tweaking offerings and commission payouts to distributors.

Many analysts have said that since life insurers will have to pay higher surrender value on non-linked products, the internal rate of return (IRR) for customers may reduce.

Implementation of the new surrender value norms is expected to slow down new product launches during the current quarter, especially in the non-linked segment, industry experts said. They added that new non-linked products will have to be launched in line with new surrender value norms.

“The industry is likely to see a slowdown in new launches during this time period and more products coming post September as most insurers will be busy recalibrating or recalculating their existing products, according to new norms. This recalculation will occupy most of their time,” said a life insurer.

Saurabh Bhalerao, associate director, CareEdge Ratings, said, “…the industry has to be compliant with the new surrender value norms by October 1, 2024. There may be some crunch in this time period as companies are busy repricing and refilling their existing ones. We might see refiling of products but the launch of fresh products is likely to be slower during the time period.”

The total number of life insurance products in the industry stood at 917 in June while the industry had 927 products in May. The number of products by private life insurers dropped from 875 in May to 865 in June, according to the Life Insurance Council’s data.

Bikash Choudhary, chief actuarial and governance officer at IndiaFirst Life, said that the industry is focused on launching new products that comply with the new surrender value norms, while also modifying existing policies.