Life insurance firms likely to see strong growth in non-linked policies

Industry preps for regulator's new norm asking companies to pay special surrender value to customers

Life insurance companies are likely to see strong growth in the sale of non-linked policies in the near term, driven by regulatory changes and expectation of a pivot in the interest rate cycle.

In June, the insurance regulator introduced norms to ensure better payouts for customers who exit their policies prematurely. The insurance industry has to implement the new norms by September 30, 2024. Non-linked or traditional policies are not linked to the market.

Life insurance companies would have to pay a 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.

Life insurance companies, because of the new norms, will have to discontinue products and tweak offerings by adjusting maturity benefits to the policyholders and commission payouts to distributors.

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. IRR is the annual rate of growth that an investment is expected to generate.

“Given that these changes in product offerings are expected to be implemented after September 30, the industry is likely to witness strong growth in the near term led by channel push, before discontinuation of current products,” said Emkay Research in a note.

“Some amount of fire sales will happen as a scarcity piece before the deadline kicks in,” said a senior executive of a private sector life insurance company. (They did not want to be named.)

“While the impact of surrender value regulations, effective from October, on IRR remains uncertain, it is premature to predict a significant surge in policy sales. However, some increase in sales could be anticipated,” said another such executive anonymously.

Listed life insurance companies have hinted that the new norms on surrender value will affect their margins, which is already under pressure due to the increased sale of unit-linked products due to a buoyant equity market.

HDFC Life Insurance has said it anticipates a gross impact of some 100 basis points (bps) on new business margin due to surrender value payable on early exits. The company would not resort to fire sale of current non-par products since the norms mandated by the regulator have better value proposition for customers.

“We are reasonably confident in our ability to mitigate this impact without compromising our customer value proposition. We endeavour to achieve this primarily through restructuring distributor payouts using a combination of deferment and claw backs”, the company had said in an analyst call after its Q1 earnings in June.

SBI Life has guided that it predicts an impact of 50-60 bps on margins due to higher surrender value norms.

Experts have said that since interest rates in the country have peaked, the IRR on non-linked life insurance products is expected to decline and potentially lead to sales increasing.

“Interest rates in India have peaked, so it is natural that they will likely start to decline from here. Therefore, it makes sense for consumers to purchase policies now rather than delay, as interest rate cuts could lower the IRR. We may see an uptick in policy sales starting from August. Meanwhile, the surrender value regulations will result in a better value proposition for customers and will benefit the industry in the long run,” said Mahesh Balasubramanian, managing director and chief executive officer of Kotak Life Insurance.

India’s domestic-rate setting panel has kept the repo rate unchanged at 6.50 per cent since February 2023 in order to achieve the 4 per cent inflation target on a durable basis.