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The IRDAI has released new regulations related to surrender charges. The new regulations are significantly better than the exposure draft released in Dec’23. In fact the contours are broadly similar to the extant regulations.

New regulations for non-linked products

A. Other than single premium products: The policy shall acquire a guaranteed surrender value on payment of premium for at least two consecutive years. The guaranteed surrender value shall be at least:

I. 30% of the total premiums paid less any survival benefits already paid, if surrendered during the second year of the policy.

II. 35% of the total premiums paid less any survival benefits already paid, if surrendered during third year of the policy.

III. 50% of the total premiums paid less any survival benefits already paid, if surrendered between the fourth year and seventh year of the policy, both years inclusive.

IV. 90% of the total premiums paid less any survival benefits already paid, if surrendered during the last two years of the policy provided the surrender value beyond the seventh year shall follow a smooth progression and converge to at least 90% of the total premiums paid less any survival benefits already paid, as the policy approaches maturity

B. Single premium products: The guaranteed surrender value shall be at least:

V. 75% of the total premiums paid less any survival benefits already paid, if surrendered any time within third policy year.

VI. Subject to (iii), 90% of the total premiums paid less any survival benefits already paid, if surrendered in the fourth policy year.

VII. 90% of the total premiums paid less any survival benefits already paid, if surrendered during the last two years of the policy provided the surrender value beyond the fourth year shall follow a smooth progression and converge to at least 90% of the total premium paid less any survival benefits already paid, as the policy approaches maturity.

Rules under exposure draft released in Dec’23

I. For the non-linked products, the exposure draft had a concept of threshold premium (INR25,000 as an example) and the surrender charge of 35% was levied on the accumulated premium until surrender.

II. The threshold premium was to be defined for each product, wherein no surrender charges would be imposed on the balance of the premiums beyond such threshold limits, irrespective of the timing of surrender.

Valuation and view

The surrender charge regulation was a key overhang for the sector as the impact of exposure draft was to the tune of 300-500bp on VNB margins of the non-par segment. Resultantly, the impact on Max Life and HDFC Life was expected to be higher given their relatively higher dependence on the segment. With this concern now behind, these stocks could outperform in the near term. However, structurally we remain positive on SBI Life.

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