Insurance Sector Update - IRDAI proposes to reduce surrender charges By Motilal Oswal Financial Services Ltd
IRDAI proposes to reduce surrender charges
? In a surprise move, IRDAI has released an Exposure Draft that proposes to reduce surrender charges on life insurance products, especially non-par savings products.
? There will be a threshold level of premium beyond which an insurer will not be able to levy the surrender charge and the premium will have to be returned to the policyholder.
? Implications:
? If the measures in the draft are implemented as they are, margins could be hit.
? If the measures are implemented retrospectively, persistency assumptions in EVs will have to be modified, leading to cuts in EV estimates.
? Product construct will have to be modified to factor in the changes.
? To offset the impact, insurers could introduce a commission structure that rewards the distributors with better persistency.
? A lower surrender charge can influence customers to invest more comfortably in products. As a result, volumes could increase, but persistency could be under pressure.
? The draft does not mention any threshold levels, and hence estimation of the exact impact is not plausible.
? Insurance companies will give feedback on the draft to the regulator, after which final regulations could be announced.
Example of the proposed measure
? Product: Non-linked savings insurance policy
? Annualized premium: INR100,000
? Policy term: 20 years
? Threshold limit: INR25,000
? The adjusted guaranteed surrender value after payment of third annualized premium may be as follows:
i) Guaranteed surrender value for threshold premium: INR25,000 x 3 x 35% = INR26,250
ii) Premium refund beyond threshold premium: (INR100,000 – INR25,000) x 3 = INR225,000
iii) Adjusted guaranteed surrender value: (i) +(ii), i.e., INR251,250 i
v) Surrender value shall be higher of (adjusted guaranteed surrender value, special surrender value)
The adjusted guaranteed surrender value after payment of first annualized premium may be as follows:
i) Guaranteed surrender value for threshold premium: Zero
ii) Premium refund beyond threshold premium: (INR100,000 – INR25,000) x 1 = INR75,000
iii) Adjusted guaranteed surrender value: (i) +(ii), i.e., INR75,000 iv) Surrender value shall be higher of (adjusted guaranteed surrender value, special surrender value).
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