Insurance companies to take hit as surrender benefit could move in favour of policyholders: Ind-Ra
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.
Ind-Ra, however, also believes defining the threshold limit for surrender value charge would be key for insurers and define their product margins. This is because a higher threshold limit would lower the adjusted guaranteed surrender value and vice versa.
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
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