After Pushback By Life Insurers, IRDAI Retains 'Surrender Value Regulations'

The Insurance Regulatory and Development Authority of India has notified the final regulations surrounding the surrender value of life insurance policies, and they are a watered down version of the December draft. This is a positive for life insurance companies.

The new regulations will come into effect from April 1. Surrender value is the amount received by the policyholder on surrender of the policy without completing its full tenure.

As per the regulations, for non-single premium life insurance policies, a guaranteed surrender value shall be paid on payment of the premium for at least two consecutive years:

• 30% of the total premiums paid if the policy surrendered during the second year

• 35% of the total premiums if the policy surrendered during the third year

• 50% of the total premiums paid if surrendered between the fourth and seventh years of the policy

• 90% of the total premiums paid if the policy surrendered during the last two years

These values would be reduced by any survival benefits already paid.

For single premium life insurance policies, the guaranteed surrender value shall be at least the following, less any survival benefits already paid:

• 75% of the total premiums paid if surrendered any time within the third year

• 90% of the total premiums should be surrendered in the fourth year or during the last two years of the policy term.

The draft regulations released in December 2023 proposed an increase in surrender value for the lapsing customers, which would have impacted stakeholders. According to Emkay Global, it would have reduced returns for the persistent policyholders, led to lower payouts to the distributors in the initial years, and impacted the life insurer’s VNB (value of new business) margin.

The notified regulations are similar to the current in-force regulations for both single and non-single premium policies as per the June 2019 notification by the regulator. There are some changes in the calculation of surrender charges.

Morgan Stanley, in its industry report, highlighted that while the regulator has retained the prevailing guaranteed surrender value guidelines for non-linked policies in the final regulations, there are some changes to the special surrender value computation.

The special surrender value factors, which are used for the computation of special surrender value, are based on asset share or notional asset share. Per the regulation, the calculation shall also be consistent with principles set out in the Guidance Note or Actuarial Practice Standard, subject to new specifications:

• expenses being consistent with the pricing basis but not exceeding the applicable expenses of management (EOM) limits,

• The interest rate shall not be less than the "pricing interest rate less than 50 bps.".

"All-in-all, this appears to be less onerous than the proposed norms by the regulator in December 2023," the report said based on discussions with life insurers.

Thus, the new regulations would not adversely affect life insurers, in contrast to the December draft, where the proposed surrender value to be paid to policyholders would be much higher than the existing regulations.

The regulations are a positive for life insurance companies, whose stocks took a beating after the December draft regulations. However, this is not much of a positive for policyholders.