Revised surrender value norms widen scope for life insurers, help customers

The customer-centric revision in surrender value norms will strengthen the bottom line of life insurers and boost penetration in the country, industry officials said. The revised surrender value norms came into effect from October 1, 2024.

 

“The new Irdai (Insurance Regulatory and Development Authority of India) norms provide a higher surrender value on account of certain specific prescriptions that are value-positive for customers. While the margin per policy for insurance companies seems to be impacted in the short term, we believe that this will strengthen the bottom line in the long run by increasing insurance penetration in the market,” said Vivek Iyer, partner, Grant Thornton Bharat.

 

 

In June 2024, Irdai, the insurance regulator, revised the norms to ensure better payouts for customers who exit their policies prematurely. According to the revised surrender value norms, life insurers have to pay higher special surrender value (SSV) to policyholders after the completion of the first policy year, if the customer has paid one full-year’s premium. Previously, companies did not pay such an amount to customers surrendering their policies soon after the first year.

 

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

 

As the norms became effective, most of the life insurers rolled out revised versions of their major participating and non-participating products, which contributed a significant portion to their overall premiums, according to the Irdai Product Regulations 2024. The remaining are expected to be launched by the end of December 2024. The companies had also requested for an extension of the deadline from the regulator for implementation of these norms.

 

The revised surrender value norms were expected to have a negative impact on the margin of life insurance companies, which is already under pressure due to increased sale of low-margin unit linked insurance plans (ULIPs) and buoyant equity markets.

 

HDFC Life Insurance had said that it was expecting a gross impact of nearly 100 bps on the company's new business margin due to higher surrender value. Similarly, SBI Life Insurance projected 50-60 bps impact on their margins due to the revised norms. Meanwhile, Max Life Insurance guided 100-200 bps impact on their margin.

 

A recent report by McKinsey said, “While regulatory reforms have prioritised customers, some have inadvertently affected insurer profitability. For instance, the change in surrender value methodology may lead to higher payouts, while the reduction of the minimum premium term from two years to one could drive up costs.”

 

However, Rushabh Gandhi, MD & CEO of IndiaFirst Life Insurance, said: “Any initiative that benefits the customer will always have a positive impact on the industry landscape over a longer period of time. Arguably, in the short run, there could be an increase in surrenders and lower persistency, but in the medium to long run, special surrender value will benefit all stakeholders.”

 

“Insurance companies have multiple levers to mitigate the impact on their margin, including changing their distribution payment by reducing commission to distributors, deferring their incentive bonus, or by offering higher persistency bonus. Furthermore, the insurers are also exploring clawback in case of lower persistency,” said an insurer, who did not wish to be named.

 

Further, experts believe that the new norms will nudge the insurers to focus on their persistency levels as policies are surrendered due to customer dissatisfaction or because of new products that offer better terms.

 

Latest data released by Life Insurance Council shows, due to the revision in surrender value norms, the sale of insurance policies in October 2024 declined by nearly 41.6 per cent year-on-year (Y-o-Y) to nearly 12 lakh as compared to 20 lakh policies in the year-ago period. In September 2024, the sale increased by 432 per cent Y-o-Y to 1.17 crore. Experts attributed the drop to adjustments by distributors to new surrender value norms due to the lack of clarity in commission structure. There was also a possibility of fire sale in the previous month before the implementation of the revised norms.

 

“The slow growth can be attributed to ULIP sales, buoyant equity markets, group single premiums, and changes in the policy structure regarding the sum assured and commissions due to revised surrender value guidelines. The number of individual non-single policies sold in October was nearly 11.3 lakh, a 42.8 per cent drop compared to the previous year, primarily due to the revised norms taking effect from the beginning of the month. This decline is only temporary, and policy sales are expected to normalise in the near future,” said Saurabh Bhalerao, associate director, CareEdge Ratings.

 

However, going forward, insurers and experts are optimistic about revival in sales and premium growth, and they believe that it could also give a nudge to the insurtech sector in the country.

 

“Also, with customers having an option to exit early, we believe the insurtech space will evolve more aggressively, given its nimble and efficient approach to innovation. Change in surrender value norms… will foster greater competition and innovation, raising the platform for customer service to a different paradigm. We expect the next two-three years to be a period of increased insurance penetration, with many new players entering the insurance industry,” Iyer added.