IRDAI’s new circular retains higher surrender values, benefiting policyholders but challenging insurers

The Insurance Regulatory and Development Authority of India (IRDAI) has issued a new master circular on life insurance product regulations, retaining the provisions for higher special surrender values (SSV). This move ensures higher premature exit payouts for policyholders but poses challenges for life insurers.

On June 12, IRDAI upheld the higher SSV provisions for endowment policies, despite concerns from insurers. This decision means that policyholders who exit their policies prematurely due to mis-selling or an inability to pay premiums will receive higher payouts compared to the current scenario. Previously, policyholders lost the entire premium if they exited after the first year, but now they will get a portion of their premiums back.

An actuary from a private life insurance company noted that the increase in surrender values is substantial in the early policy years, benefiting many policyholders who surrender their policies early. Although the increase in surrender values will be lower in the later years, it will still be higher than before.

IRDAI stated that the SSV should at least equal the present value of the paid-up sum assured and future benefits, using a formula: (number of premiums paid X sum assured) / total number of premiums payable. In the draft circular issued last month, insurers were required to use the 10-year G-sec yield for discounting purposes. The final circular allows a maximum spread of 50 basis points over the 10-year G-sec yield for discounting, which reduces the surrender value by approximately 4-5% compared to the draft proposals.

Life insurers had opposed the higher SSVs, arguing that these products are designed for long-term goals, not liquidity. The CEO of a large private life insurance company highlighted the industry’s concerns, stating that reserving will need to increase and more capital will be required. The industry had proposed a complete refund of premiums in cases of mis-selling instead of higher surrender values, due to the difficulty in recouping commissions paid in the initial years.

Overall, while the new regulations by IRDAI are set to benefit policyholders with higher premature exit payouts, they also present significant challenges for life insurers in terms of increased reserving and capital requirements.