Mumbai: The Insurance Regulatory and Development Authority of India (Irdai) has released a set of draft product regulations that will force insurers to review their profit margins and rejig distributor commissions.
In this draft circular, the regulator has suggested changes in surrender value rules for non-linked life insurance policies.
Under the current draft Irdai regulations on non-linked insurance products, surrender values are determined based on a percentage of premiums paid by the policyholder, which increases with the number of premiums paid.
For instance, surrendering the policy in the first year yields no surrender value, but it increases to 30% for the second year, 35% in third year year and so on. The existing framework aims to provide only a percentage of surrender value based on the premiums paid. The customer gets smaller percentage of premiums paid for early exits as life insurance is long term. Balance constitutes surrender charges for insurer.
In a move, which proposes to increase the surrender values for policyholders, the regulator has proposed that surrender charges should be imposed only up to a threshold limit of premium to be defined for each product. On premiums paid beyond the threshold limit, no surrender charges can be charged by insurer and entire balance of premium beyond threshold limit will be refunded to customer.
For instance, a non-par policy with an annual premium of ₹1 lakh for the first three policy years. Assuming a threshold limit of ₹25,000 per year, the surrender value % (35% for third year surrender) based on the year of surrender will be applied only up to ₹75,000 (₹25,000*3) and 100% of the premiums in excess of ₹25,000 per year would also be paid as surrender value. This could increase the guaranteed surrender value for customers.
“While the proposed changes will increase the guaranteed surrender value payable to policyholders, it may impact the profit margins of life insurers,” said an insurance executive. “This could also compel life insurers to defer the commission beyond the first year and link it to premium payment to avoid losses on early exits.”
BC Patnaik, member, Irdai, said on the sidelines of a Assocham event on Thursday that insurers will have an opportunity to give their views on consultation paper.
