Insurance stocks fell up to 5% in trade today (Friday, December 15), defying the overall positive market trend, after the Insurance Regulatory and Development Authority of India (IRDAI) proposed a higher surrender value and lower charges for life insurance companies in a consultation paper.
Max Financial Services was the worst hit, falling as much as 4.8 percent to 969. It was followed by HDFC Life Insurance Company, which fell 3.2 percent to an intraday low of 685 rupees. In intra-day trading today, Life Insurance Corporation (LIC) fell 2.5 percent to 795 and ICICI Prudential Life Insurance down 2.3 percent to 520.10.
In today's trading, ICICI Lombard General Insurance, The New India Assurance Company, and SBI Life Insurance were all down 1-1.5 percent. The difference in performance among life insurance stocks can be attributed to a recent draft produced by IRDAI. The draft suggests a considerable rise in the surrender value for non-participating insurance products, as well as changes to how surrender charges are computed. The proposed modification calls for the establishment of a specific premium threshold for each product, over which no surrender charges will be applied. This change is intended to boost surrender values and may have an influence on the profit margins of non-participating products.
In the context of insurance,'surrender' refers to the policyholder's voluntary termination of a life insurance policy prior to its maturity or the occurrence of the insured event. When a policy is surrendered, the policyholder is released of the duty to pay premiums, resulting in the termination of insurance coverage. Nonetheless, the life insurance company is required to deliver a set surrender value to the policyholder who has paid premiums during the specified interim period.
According to media sources, the regulatory agency has been studying the matter for a long time, looking into incidents where policyholders received low surrender values despite paying premiums for numerous years. According to reports, there have been occasions where life insurance companies built products in such a way that a considerable portion of policyholder premiums were absorbed as surrender charges, particularly in settings tailored to encourage surrenders. The investigation sought to resolve issues concerning policyholder fairness and transparency in the insurance business.
The IRDAI consultation document suggests a significant rise in the surrender value for surrendered plans, as well as a reduction in surrender charges imposed by life insurers. While this programme benefits policyholders by allowing them to recuperate a greater amount of their paid premiums when plans are terminated before maturity, it presents issues for life insurers. Higher surrender values would put pressure on life insurance firms' profit margins, particularly in the non-participating portfolio, where the majority of surrenders normally occur. The move is intended to create a balance between policyholder advantages and insurer financial concerns.
Consider the following scenario:
Consider a non-participating policy with a 1 lakh annual premium that was surrendered after five premium payments totaling 5 lakh in its sixth year. If the life insurance sets a criterion of 25,000, the five-year threshold would be 1,25,000. The surrender value is now calculated at 35% of the threshold value of $1,25,000, for a total of $43,750. Examining the return above the threshold value entails computing the surrender value based on the entire premium paid less the threshold value, which is 5 lakh - 1,25,000, or 3.75 lakh. The total surrender value to be paid by the life insurance to the policyholder is 4.18 lakh when the threshold value and the refund above the threshold value are combined.
In comparison, the current system pays the life insurance business 1,25,000 on a 5 lakh premium, whereas the new regime increases the surrender value to 4.18 lakh. Furthermore, the current system allows the life insurance firm to charge or retain 3.75 lakh as surrender charges, whereas the proposed rule decreases this drastically to about 80,000 (5-4.18 lakh).
Thus, the proposed modifications reflect a significant shift in favour of policyholders, giving them with a significantly larger surrender value while lowering the financial impact on surrender charges faced by the life insurance firm.
