IRDAI’s status quo on surrender charges a relief for insurers, but setback for policyholders

In a relief to life insurance companies, the Insurance Regulatory and Development Authority of India (IRDAI) has decided to retain the current regulations on surrender charges in traditional endowment policies.

For policyholders, this is not a favourable development as the IRDAI’s December 2023 draft had proposed lower surrender charges (and thus higher surrender values or payouts on premature exit) on endowment policies. The final rules will come into force from April 1, 2024.

For instance, currently, a policyholder surrendering her policy after paying two years’ premiums is entitled to receiving only 30 percent of her premiums back. Had IRDAI’s earlier proposal been approved, this would have gone up to 175 percent. If the policyholder surrenders her policy after paying five annual premiums, at present, she is eligible to get 50 percent of the premium paid until then back. The December draft had proposed a premium refund of 75 percent for surrenders in the fifth policy year.

Also read: IRDAI rolls out revised product regulations for insurance industry, policyholders

IRDAI’s board votes for status quo on surrender values

At its board meet on March 19, IRDAI decided to retain the existing provisions, effectively scrapping the December 2023 proposals. This move is in favour of life insurance companies. “The status quo… is a big departure from the exposure draft of December 2023. It provides a big relief to the life insurers,” research firm Emkay Global said in a note.

However, the withdrawal of the draft provisions governing surrender charges is not good news for policyholders who will continue to make losses if they were to exit early.

Most life insurance companies had taken a stand against the December draft, citing asset-liability management issues given that they invest in long-term papers with tenures of up to 40 years and lower returns to persistent policyholders. That is, those who decide to stay invested throughout the original tenure of the policy.

However, IRDAI data shows that majority of endowment policyholders – around 50 percent - allow their policies to lapse in the fifth year. They tend to surrender their policies or let them lapse due to various reasons, including mis-selling by banks and agents and inability to pay premiums over the long-term. Since commissions and charges are front-loaded, policyholders lose more when they make an exit in the initial years.

Kamesh Goyal, Chairman, GoDigit Group of Insurance Companies had taken a contrarian stand, backing the proposal to reduce surrender charges. “If you look at the last ten years and, say, 100 households have bought a non-par policy, 90 percent of them would have lost money. Almost the entire commission is also upfront. So, basically, this product is not long-term in nature. And with the sort of losses that it is causing, it doesn't make any sense from a customer's perspective,” he’d told Moneycontrol in an exclusive interview in February 2024.

Also read: GoDigit Chairman Kamesh Goyal backs IRDAI's higher surrender value proposal, opposes insurers' roll-back demand

Onus on life insurance companies to devise customer-friendly products

“(Had the December proposals been finalised) life insurers…had the tough task of balancing the impact of increased surrender value to the lapsing customers by tinkering the distributor’s payout, providing benefit to the persistent policyholders, and maintaining shareholders’ profitability (value of new business or VNB margins),” Emkay Global said.

Life insurance companies, however, must work towards devising cost-efficient products to address the customers’ needs. “…and not the other way, by demanding higher cost allowance for the complicated products. The life insurers also need to overcome the prey-predator relationship with their large distributors,” the research note said.

Preeti Kulkarni is a financial journalist with over 13 years of experience. Based in Mumbai, she covers the personal finance beat for Moneycontrol. She focusses primarily on insurance, banking, taxation and financial planning

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