The Insurance Regulatory and Development Authority of India (Irdai) has issued a consultation paper regarding the enhancement of surrender values for life insurance policies.
The insurance regulator issued a set of preliminary product regulations, prompting insurers to reassess their profit margins and adjust distributor commissions. Within this draft circular, the regulator has proposed alterations to surrender value rules for non-linked life insurance policies.
This stands as a clear advantage for policyholders, thus ensuring they receive a significant portion of their premiums if the policy doesn’t reach maturity. However, as life insurers will need to pay higher surrender values, it is anticipated to have a negative impact on their profit margins. This change is likely to affect non-participating portfolios the most, as surrenders are more prevalent in that segment.
In addition to the guaranteed surrender value (GSV), the regulator has also proposed that insurers refund premiums exceeding a certain threshold back to policyholders.
Breaking down the proposed changes through an example, Irdai presented a scenario involving a non-linked savings insurance policy. In this case, with an annualised premium of Rs 1 lakh and a 20-year policy term, considering a threshold limit of Rs 25,000, the adjusted GSV after the payment of the third annualised premium is computed as follows:
i. GSV for threshold premium: Rs 25,000 x 3 x 35 per cent = Rs 26,250
ii. Premium refund beyond threshold premium: Rs (1 lakh – 25,000) x 3 = Rs 2.25 lakh
iii. Adjusted GSV: (i) +(ii), i.e. Rs 2,51,250.
iv. Surrender value will be the higher of Adjusted GSV or Special Surrender Value (SSV)
The GSV represents the minimum amount that an insurance company disburses to the policyholder when surrendering the policy, and it is established at the policy’s initiation.
On the other hand, the SSV is an amount provided at the discretion of the insurance company, exceeding the GSV. The SSV considers factors, such as the policy’s duration, the number of premiums paid, current market conditions, and other relevant elements.
For a non-linked savings insurance policy with an annualised premium of Rs 1 lakh and a 20-year policy term, and assuming a threshold limit of Rs 25,000, if the policy is surrendered in the first policy year, the adjusted GSV after payment of the first annualized premium is as follows:
i. GSV for threshold premium: Nil
ii. Premium refund beyond threshold premium: Rs (1 lakh – 25,000) x 1 = Rs 75,000
iii. Adjusted GSV: (i) +(ii), i.e. Rs 75,000
iv. Surrender value will be the higher of (Adjusted GSV or SSV)
It is mandated that all individual non-linked savings and protection-oriented products, including non-linked life insurance and pension products (excluding pure risk premium products like term insurance, health insurance, and immediate annuity products), must incorporate a guaranteed surrender value.
According to a research note from global brokerage Morgan Stanley, concerns among investors have risen due to the regulator’s recommendations for higher surrender values on non-linked products. The focus of worry revolves particularly around the potential impact on the value of new business (VNB) margins, especially in the non-participating business sector.