Surrender fee: Insurers propose dual structure as regulator pitches for a hike
insurance industry is proposing a dual structure in response to the regulator's pitch for an increase in the surrender value for non-participating policies, said people with knowledge of the matter. The insurers have suggested a higher surrender value for short-term policies while retaining the existing model for long-term ones as they attempt to comply with the consumer-friendly proposal and manage profitability as well.
The insurers had met during a Life Insurance Council meeting earlier this week.
A higher surrender value on nonpar policies, which guarantee survival or maturity benefit without depending on insurers’ profit, could lead to an increase in more people giving up on policies prematurely, according to the insurers.
This could result in a decline in persistence levels — or the proportion of policyholders who opt to pay premiums regularly — for the life insurance sector, according to them. Long-term products are those with a premium paying term of over 10 years.
The Insurance Regulatory and Development Authority of India (IRDAI) had last week issued a draft paper recommending an increase in the surrender value for policyholders.
“While a higher surrender value is expected, we have expressed our concern about a rise in surrender leading to lower persistency,” said a senior insurance executive.
IRDAI has proposed changes to how surrender charges are calculated on non-participating, traditional insurance plans.
It suggests that such charges should apply up to a threshold of the premium paid each year. Any amount beyond this limit should be paid to the customer as surrender value.
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