The Insurance Regulatory and Development Authority of India’s (IRDAI) draft circular on redesigning the policyholder surrender value through the revised concept of threshold limit and adjusted guaranteed surrender value for non-linked policies (both par and non-par) will affect the overall margins of insurance companies, if implemented in its existing shape, according to India Ratings and Research (Ind-Ra).
The new surrender value as per the revised defined formula would be significantly higher than existing payback on surrenders, even as the threshold limit proposed for surrender charges remains at discretion of insurer. Nevertheless, any balance premium beyond such limit, irrespective of the timing of surrender, has to be paid back to the policyholder. This is in continuation to the earlier guideline which defined the ULIP (unit linked insurance plan) surrender or lapsation payout, thereby improving the product acceptability in the industry.
Insurers having a higher share of non-linked saving policies in their overall product mix will be impacted more than the ones having a higher share of term life protection and linked policies. The revision might also lead to recalibration of operating expenses at insurer level to manage product margins, thereby overall profitability.
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As per Ind-Ra, these products were highly profitable and focus areas for all insures due to the higher margins involved, where surrender or lapses could have driven a certain portion of margin benefits in the existing regime. Thus, insurers would need to recalibrate their product strategies to drive persistency in their existing products, as well as would reduce commission payouts or increase premium in these products. However, all these measures could impact the volume of policies being sold or demand.
“This could also impact persistency of insurers, as a higher surrender value can reduce the policyholder stickiness to the existing insurer and increase portability among insurers,” says Karan Gupta, Director, Ind-Ra.
As per the calculation defined by the regulator, payout could be significantly higher than in the previous methodology, acting as a drag on the overall margins. Any tweaking by insurers in the first year payout could also affect bancassurance partners’ fee income.
The premium threshold would define the surrender charge, beyond which the premium would have no surrender charges levied. Policies shall acquire a guaranteed surrender value on the payment of premium for at least two consecutive years and shall be minimum 30% of the total premium paid less survival benefits already paid, and will vary based on term of surrender. This value would be added to the premium paid less the threshold limit (surrender charge) multiplied by the year of surrender.
The guaranteed surrender value would vary for single premium products and regular paying products. IRDAI has also introduced the concept of special surrender value (SSV), largely in case of participating policies where bonus gets accumulated over the tenure of policies. SSV for non-par saving policies shall reflect the notional asset share, guaranteed maturity or survival benefit under the policy. The payable to policyholders would be higher of the adjusted surrender value or SSV.