IRDAI Evaluates Hike in Policy Surrender Charges

The Insurance Regulatory and Development Authority of India (IRDAI) is likely to revisit its proposal to increase the surrender charges of a policy, which are the fees deducted by life insurers when a policyholder terminates a policy before its maturity. The proposal, which was released in December 2023 as part of a draft product regulation, has met with resistance from the life insurance industry, which fears that it would erode their margins and encourage more policy surrenders.

What are surrender charges?

Surrender charges are the fees that life insurers deduct from the surrender value of a policy, which is the amount payable to the policyholder on voluntary termination of a policy during the term. The surrender value depends on factors such as the type of policy, the premium paid, the duration of the policy and the benefits accrued. The surrender charges are meant to discourage policyholders from exiting a long-term savings and protection product prematurely and to compensate the insurer for the expenses incurred in issuing and maintaining the policy.

What did IRDAI propose?

IRDAI proposed to create a premium threshold defined for each product, beyond which no surrender charges would be imposed, irrespective of the time of surrender. The premium threshold would be based on recommendations of the regulation review committee, which was set up by IRDAI in 2022 to review existing regulations and suggest changes. IRDAI also proposed to increase the guaranteed surrender value for individual non-linked savings and protection-oriented life insurance policies, which would be adjusted for survival benefits already paid. The guaranteed surrender value would range from 30 per cent to 90 per cent of the total premium paid, depending on the year of surrender. The proposal aimed to provide a fair and reasonable amount to policyholders towards the end of the term, which would be closer to the expected maturity value.

Why are life insurers unhappy?

Life insurers have raised several concerns over the proposal, which they believe would have a negative impact on their business. According to industry sources, around 40 per cent of the total benefits paid by life insurers to policyholders in 2022-23 were on account of surrender or withdrawal of policies. A higher surrender value would only incentivise more surrenders, rather than positioning life insurance as a long-term savings and protection product. Life insurers also argued that a higher surrender value would reduce their profitability and solvency, as they would have to pay out more money than they had anticipated while pricing their products. Moreover, life insurers pointed out that different products have different liquidity preferences and risk profiles, and hence a uniform premium threshold and surrender value may not be suitable for all products.

What is IRDAI likely to do?

According to sources, IRDAI may consider rationalising the proposal to increase the surrender charges after discussions with life insurance companies. The regulator may take into account the feedback received from the industry and revise some of the parameters such as the premium threshold, the slab-based guaranteed surrender value and the product-specific constructs. The regulator may also consider reducing the threshold for policies that are considered long-term from seven years to five years. The final decision is expected to be taken in IRDAI’s March board meeting.

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