IRDAI's proposal to hike surrender value for non-par products could impact insurers’ VNB margins, profit, say experts

As part of its Mission 2047 'Insurance for All', IRDAI is planning to expand the reach of insurance schemes and awareness across customer segments.

A proposed increase in the surrender value for non-participating (non-par) products may affect the profits and value of new business (VNB) margin of insurers, industry experts said.

On December 14, the Insurance Regulatory and Development Authority of India (IRDAI) issued a draft circular proposing that the surrender value on non-par insurance products be increased.

The surrender value is the amount that the policyholder receives from the insurer if they decide to terminate the policy before its date of maturity.

Currently, the draft circular is open for public comments and suggestions.
Industry experts and players said that the details of the circular, if adopted, could affect the insurers’ bottom lines.

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“The companies will have an impact due to the rise in surrender value as they would have to pay more to the policyholder. This will affect the profits,” said Saurabh Bhalerao, associate director, BFSI, CareEdge.

Kiran Kumar Boosam, vice president and industry platform leader for insurance, India, Capgemini, said: “The proposition can have potential impact on the VNB margins in the non-participating linked insurance products. This may encourage such insurance companies to revisit product design for reducing surrenders while engaging with policyholders.”

Additionally, an executive of an insurance company, who did not wish to be identified, said that the cost for insurers will rise as they will have to pay more to policyholders.

What does the IRDAI circular say?

The regulator has proposed a high surrender value on non-par insurance products. A non-par policy is a product that does not provide dividend payouts and policyholders cannot share the insurance company's profits.

Additionally, these policies do not offer any annual payouts but contrary to par products, most non-par policies offer a guaranteed maturity benefit. Some examples of non-par products include a term insurance policy or fixed life insurance policy.

Currently, in case of premature surrender of non-par policies, charges are levied based on the value of premium received and is in the range of 10-70 percent, brokerage house Jefferies said.

"Charges are high if the policy is surrendered soon and lower when surrendered after five years," Jefferies said.

IRDAI has also proposed a threshold level of premium for different products, beyond which an insurer will not be able to levy surrender charges and the premium will have to be returned to the policyholder.

Also read: HDFC Life, Max Financial shares fall on IRDAI proposal of higher surrender value

Here, domestic brokerage firm Motilal Oswal explained in a note that the draft does not mention any threshold levels, so it is difficult to estimate the exact impact of the move.

“However, it could mean more customers will now invest comfortably in these products, but persistence could be under pressure,” Motilal Oswal said.

To offset the impact, insurers might introduce a commission structure that rewards distributors who can get the policyholders to hold on to policies for longer, i.e., better persistence, Motilal Oswal added.

But why now?

As part of its Mission 2047 'Insurance for All', IRDAI is planning to expand the reach of insurance schemes and awareness across customer segments.

"We'll see a radical change in the nature of insurance buyers. As the level of awareness is on the rise, we will see more and more customised products. This means we need more players, more distributors and more capital needs to be infused in the sector," IRDAI chairperson Debasish Panda said at the Global Fintech Fest 2023 on September 6 in Mumbai.

Bhalerao also highlighted that IRDAI is aiming to boost insurance penetration in India, and the draft circular aims to do that.

Highlighting Panda’s view on customised products, Boosam said: “IRDAI has been taking measures to decrease the rigidity of life insurance products, encouraging flexible product design by insurers and benefitting policyholders.”