According to people with knowledge of the situation, the life insurance sector is putting up a dual structure in response to the The Insurance Regulatory and Development Authority of India (IRDAI)'s request for an increase in the surrender value for non-participating policies, the Economic Times reported. As they try to manage profitability and adhere to the consumer-friendly proposal, the insurers have proposed keeping the current model for long-term policies but offering a higher surrender value for short-term policies. Earlier this week, at a meeting of the Life Insurance Council, the insurers had gathered, the report added.
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The Economic Times' report further added that according to the insurers, more people may abandon nonpar policies early if the surrender value is increased. Nonpar policies guarantee survival or maturity benefit without relying on insurers' profit. They predict that this will lead to a fall in persistence levels for the life insurance industry, or the percentage of policyholders who choose to make regular premium payments. Products that have a premium payment term longer than ten years are considered long-term.
The Insurance Regulatory and Development Authority of India (IRDAI) released a draft document last week that suggested raising policyholders' surrender values.
A senior insurance executive told the the Economic Times he expects a higher surrender value but they have expressed concern about a rise in surrender leading to lower persistency.
The IRDAI has suggested modifying the formula used to determine surrender charges for conventional insurance plans that do not participate. It recommends that these fees be imposed up to a certain amount of the annual premium. Any sum over this cap must be given as surrender value to the client. For instance, the surrender charges will only be applicable up to Rs 75,000 (Rs 25,000x3) for an individual with an annual premium of Rs 1 lakh for the first three years and an annual limit of Rs 25,000. The customer would receive a refund for any premiums that exceeded the threshold, which could increase guaranteed surrender values. At the moment, surrender values are calculated as a percentage of the premium and rise in proportion to the annual premiums paid.
The industry is okay with a higher surrender value because anyone surrendering a short-term policy, like a five-year plan, in the third year has already paid the majority of the premium and is getting closer to maturity. Maturity is still a while off in a long-term policy that surrenders early, say in the third year of a ten- or fifteen-year plan. Indeed, there is no distinction made in the IRDAI paper between short- and long-term policies regarding higher surrender values.
As their margins are wider, traditional non-participating products are very profitable for insurers. For instance, the proportion of such products offered by the government-owned Life Insurance Corp of India (LIC) increased from 7.12% in March 2021 to 10.7% in September. Due to higher margins, it wishes to raise the share of non-par to 15% of the annualized premium.
