MUMBAI: Life insurance premium collections may see volatility in the second half of the current fiscal due to the implementation of new surrender value guidelines on life policies beginning next month, according to a report by Care Edge.
“IRDAI has announced new regulations regarding surrender values, to be implemented from October 1, 2024. The product and commission structure could likely witness significant changes, leading to volatile premium movement in the second half of the current fiscal,” said Gaurav Dixit, Director at CareEdge Ratings, in the report.
In insurance, surrender refers to a policyholder terminating their policy before maturity. The amount payable to the policyholder upon termination is called the surrender value.
After extensive deliberations, the IRDAI issued its final surrender value guidelines in June 2024, proposing higher surrender values for policyholders. Presently, policyholders can only surrender their policies after paying premiums for two full years. However, the new guidelines mandate insurers to calculate a special surrender value (SSV) after the completion of just one policy year. This means policyholders will receive some surrender value even if they exit after one year, provided they have paid the full year’s premium.
The new guidelines will also raise the surrender value to 70-75% of the premium, up from the current 30%, across different product and tenures.
In its Q1FY25 earnings call, HDFC Life projected a gross impact of around 100 basis points on its new business premium (NBP) margin due to the higher surrender value, whereas SBI Life expects minimal impact (much lower than 1%) due to its product mix and conservative assumptions on surrenders.
Max Financials estimated a 100-200 basis point impact on its value of new business (VNB). It plans to distribute this impact among customers, distributors, and shareholders.
CareEdge Ratings’ Dixit, however, said premium growth is likely to pick up in the medium term as the new surrender values are expected to be more favorable for customers.
Meanwhile, the NBP of life insurers grew 21% year-on-year to ₹1.54 lakh crore in the April-August period. Life Insurance Corporation (LIC) alone accounted for 62% of the total NBP at ₹95,181 crore during the first five months of the fiscal.
“CareEdge anticipates that the life insurance industry will sustain a growth rate of approximately 11-13% over the next three to five years,” Dixit added.
Source: The Financial Express
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