Recent developments in the Indian life insurance sector indicate a significant shift in policy surrender fees, a move that has prompted life insurance firms to seek more time from the Insurance Regulatory and Development Authority of India (IRDAI) to assess the implications.
IRDAI has proposed changes to the surrender value of non-linked life insurance policies, aimed at increasing the surrender value for policyholders. This change is part of a broader effort by IRDAI to overhaul regulations and introduce more policyholder-friendly measures. The regulator has put forth an exposure draft that repeals six existing regulations and introduces new ones, including revised rules on surrender values. The key change is the introduction of a premium threshold for each product, beyond which no surrender charges will be imposed, regardless of the time of surrender.
Life insurance companies are concerned that this increase in surrender value could negatively impact their margins, particularly in the case of non-participating policies. They fear it might encourage policy surrenders, which contradicts the long-term nature of life insurance products. The new regulations propose that the surrender value should be close to the expected maturity value towards the end of the term, which is seen as a positive step for policyholders.
However, there are concerns about the potential impact on the industry. For instance, Kotak Institutional Equities pointed out that the insurance commissions, which are currently front-loaded, may not be ready for deferment and may require time to transition to a revised compensation structure. This change is crucial for reducing mis-selling and aligns with the mutual fund industry’s full trail model. Additionally, stakeholders are worried that making surrendering policies less punitive could affect persistency rates, leading to more policy surrenders, which could harm long-term policyholders’ interests and the overall industry.
In response to these concerns, life insurance companies are seeking more time from IRDAI to fully evaluate the impact of these proposed changes on their financials. The draft regulations were open for comments until January 3, 2023, and there’s a possibility that this period may be extended to allow for a more comprehensive assessment.
These developments represent a significant shift in the Indian life insurance market, with potential implications for both policyholders and insurance companies. The outcome of these proposals and the industry’s response will shape the future dynamics of life insurance in India.